Question

The following are independent situations for which you will recommend an appropriate audit report: 1. Subsequent to the date of the financial statements as part of his post-balance sheet date audit procedures, a CPA learned that a recent fire caused heavy damage to one of a client’s two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail. The financial statements and footnotes as prepared by the client did not disclose the loss caused by the fire. 2. During the course of his audit of the financial statements of a corporation for the purpose of expressing an opinion on the statements, a CPA is refused permission to inspect the minutes of board of directors’ meetings that document significant decisions of the board. The corporation secretary instead offers to give the CPA a certified copy of all resolutions and actions involving accounting matters. 3. A CPA is engaged in the audit of the financial statements of a large manufacturing company with branch offices in many widely separated cities. The CPA was not able to count the substantial undeposited cash receipts at the close of business on the last day of the fiscal year at all branch offices. As an alternative to this auditing procedure used to verify the accurate cutoff of cash receipts, the CPA observed that deposits in transit as shown on the year-end bank reconciliation appeared as credits on the bank statement on the first business day of the new year. He was satisfied as to the cutoff of cash receipts by the use of the alternative procedure. 4. On January 2, 2020, the Retail Auto Parts Company received a notice from its primary supplier that effective immediately, all wholesale prices will be increased by 10 percent. On the basis of the notice, Retail Auto Parts revalued its December 31, 2019, inventory to reflect the higher costs. The inventory constituted a material proportion of total assets; however, the effect of the revaluation was material to current assets but not to total assets or net income. The increase in valuation is adequately disclosed in the footnotes. 5. A CPA has completed her audit of the financial statements of a bus company for the year ended December 31, 2019. Prior to 2019, the company depreciated its buses over a 10-year period. During 2019, the company determined that a more realistic estimated life for its buses was 12 years and computed the 2019 depreciation on the basis of the revised estimate. The CPA has satisfied herself that the 12-year life is reasonable.The company has adequately disclosed the change in estimated useful lives of its buses and the effect of the change on 2019 income in a note to the financial statements. 6. E-Lotions.com, Inc., is an online retailer of body lotions and other bath and body supplies. The company records revenues at the time customer orders are placed on the website, rather than when the goods are shipped, which is usually two days after the order is placed. The auditor determined that the amount of orders placed but not shipped as of the balance sheet date is not material.

b. State the level of materiality as immaterial, material, or highly material. If you cannot decide the level of materiality, state the additional information needed to make a decision.

Answer 1

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Question	Explanation for Part (a)	Explanation for Part (b)
1	The event has occurred post balance sheet date. The opinion do not get effected due to the subsequent occurred. However the Auditor has to ensure that a notes has been disclosed properly regarding the going concern of the entity. Since the client did not put any footnotes, the Auditor may escalate the matter to Those Charged with Governanace(TCWG). If the TCWG do not modify the footnotes, then the Auditor may consider the possibility of Qualified Opinion since the matter is significant.	Material
2	This is something called as Imposing limitations on the Auditor work. In such cases,the Auditor has to perform Alternate Audit procedures for the audit evidence he has to obtain. In the given case, he got the copy of resolutions and actions which are sufficient for expressing his opinion. But however, if the Auditor in his professional judgement feels that he has to verify the minutes he may escalate the matter to TCWG. Even after that, if he is not satisfied with the response, he may based on his professional judgement can highlet this matter through a Emphasis paragraph in his Audit report if he feels that there could be a material event occurred based on his inspection of accounts.(This is practically may not be possible and since the matter is not so material he may get the information based on the direction of TCWG). Considering the case given in the question, Unqualified opinion has to be issued.	Immaterial
3	The Alternate audit procedure that the CPA performed appears reasonable. However he should also obtain from the management a written representation letter stating that management has verifed the cash as at year end and no deviations have been observed from the Books of accounts. Further he may also check Internal audit reports of such Manufacturing company and check for relavant cash and Bank controls as well. He can issue Unqualified opinion after performing the alternate audit procedures.	Immaterial
4	In the given case, the prices are increased with effect from 2nd January, this is no where relavant to Closing stock as on 31st December 2019. Even if the Retail parts company purchased on credit basis, it would have bought based on the term and conditions that are in effective before or on 31st December. Therefore the revaluation should not be carried out. The Auditor has to inform the Management and encourage them to rectify the error. If the management disagree, then the Auditor may express qualified opinion since the stock is a significant matter.	Highly Material
5	Question says :- The company has adequately disclosed the change in estimated useful lives of its buses and the effect of the change on 2019 income in a note to the financial statements. Opinion: The company should not only disclose the impact in Notes to Financial statements but should debit/credit in the Books of accounts as well which would ultimately reflect in the Income statement and Balance Sheet. CPA has to escalate the matter to management and encourage them to rectify the error. If the management disagree, then the Auditor may express qualified opinion.	Material
6	The revenue recognition conditions may differ from country to country. Normallay revenue is recognised when the goods are shipped to customers and not orders are placed. Assuimig the Audior has excercised his professional judgement and came to a conclusion that orders placed but not shipped is not material, he could issue unqualified opinion. He may also encourage the management to disclsoe the orders not shipped in notes to accounts.	Material if Revenue recognition is a wrong approach. Immaterial if Auditor excercised his judgeemnt and came to conclusion it is right.