Question

3-25

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.

a. Identify which of the conditions requiring a deviation from a standard unmodified opinion audit report is applicable, if any.

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.

c. Given your answers in parts a. and b., state the appropriate audit report from the following alternatives (if you have not decided on one level of materiality in part b., state the appropriate report for each alternative materiality level): (1) Unmodified opinion—standard wording (2) Unmodified opinion—explanatory paragraph (3) Unmodified opinion—nonstandard report wording (4) Qualified opinion—GAAP departure (5) Qualified opinion—scope limitation (6) Disclaimer (7) Adverse*

Answer 1

answer  

1.Conditions : -The assumption of going concern is affected due to the company have suffered heavy damages due to fire ,which has put its future existence in danger as noticed by auditor .however the company has not accounted for such loss in its financial statements .

Materiality level : material as it a significant event occurring after the balance sheet date

Audit Report : -adverse opinion

2. .Conditions :- placing restriction on the access of the auditor to the minutes of the meeting of the board of directors(BOD)

Materiality level : material

Audit Report : Disclaimer an opinion because management was not cooperating with the auditor.

3.Conditions : -performing an alternative procedure to reduce the inabiliy to count considerable cash receipts not deposited in the banks .

Materiality level : material because amount involve is quite substantial and significant

Audit report : unmodified opinion -explanatory paragraph

4. Conditions : -Not Applicable

Materiality level :immaterial due to impact of revaluation in value of inventory is material to current assets only but not net income or total assets

Materiality level : unmodified opinion -standard wording .

5.  Conditions : -Not Applicable

Materiality level :immaterial because change in useful life from 10 to 12 years is considered as change in estimation of accounting policy and appropriateness of which has been evaluated by auditor along with adequate disclosure in notes of financial statements.

Audit Report : -unmodified opinion -standard wording

6. Condition :- Non recognition of revenue in accordance with the relevent accounting standards

Materiality level :  immaterial as determined by auditor.

Audit Report : -qualified  opinion -GAAP departure.

7. Condition :- placing restriction on the scope of the auditor , resulting in non performing of audit procedure.

Materiality level ; material because inventory are considered material .

Audit Report : - qualified opinion - limitation of scope

(if you have any doubt ask me )