Question

Make pretend you are a partner in charge of the 2018 audit of Sickler Corporation, a private company. The audit report has not yet been prepared. In each of the following situations (a-h), indicate the appropriate action (1-7) to be taken. Justify your answer with an explanation. The possible actions are as follows:

1.   Issue an unmodified opinion audit report.

2.   Qualify both the scope and opinion paragraphs.

3.   Qualify the opinion paragraph.

4.   Issue an unmodified opinion with an explanatory paragraph.

5.   Issue an unmodified opinion with revised wording (no explanatory paragraph).

6. Issue an adverse opinion.

7.   Disclaim an opinion.

The situations are as follows:

____ 6___ a. Sickler Corporation carries its fixed asset (Bldgs, property, and Equipment) accounts at current market values. The current market values are greater than the historical cost by a highly material amount, and the effects are pervasive throughout the financial statements.

Justify your answer with an explanation:

________ b. The owners of Sickler Corporation will not permit you, the auditor, to observe, or make, any counts of inventory. The recorded book value of inventory is highly material.

Justify your answer with an explanation:

________ c. You couldn’t confirm the accounts receivable with Sickler's customers. However, because of detailed sales and cash receipts records, you were able to perform reliable alternative audit procedures.

Justify your answer with an explanation:

_____7___ d. A few days before the end of fieldwork, you discover that the audit manager on the Sickler engagement owns a material amount of Sickler's common stock.

Justify your answer with an explanation:

_____5___ e. You relied upon another CPA firm to perform part of the audit. Although you were the principal auditor, the other firm audited a material portion of the financial statements. You wish to refer to (but not name) the other firm in your report.

Justify your answer with an explanation:

________ f. You have substantial doubt about Sickler's ability to continue as a going concern.

Justify your answer with an explanation:

____4____ g. Sickler Corporation changed its method of computing depreciation in 2018. You agree with the change and the change is properly disclosed in the financial statement footnotes.

Justify your answer with an explanation:

________ h. Sixteen days after the balance sheet date (but before audit opinion was issued), one of Sickler's buildings was destroyed by a hurricane. Sickler refuses to disclose this information in a footnote to the financial statements, but you believe disclosure is required to conform with GAAP. The amount of the uninsured loss was material, but not highly material.

Justify your answer with an explanation:

Answer 1

6-a. Historical cost is original cost incurred in past to acquire an asset.it is clearly the most objective, reliable and verifiable of a lot.

Historical cost basis of accounting fails to account for the true economic cost of using assets. This effect of the use of historical cost basis is best explained by way of an example.

Company A purchased a plant for $100 on 1st January 2012 which had a useful life of 10 years.

Company B purchased a similar plant for $200 on 31st December 2017.

Depreciation is charged on straight line basis.

At the end of the reporting period at 31st December 2017, the balance sheet of Company B would show a fixed asset of $200 while A's financial statement would show an asset of $50 (net of depreciation).

The scenario above presents an accounting anomaly. Even though the plant presented in A's financial statements is capable of producing economic benefits worth 50% of Company B's asset, it is carried at a historical cost equivalent of just 25% of its value.

Moreover, the depreciation charged in A's financial statements (i.e. $10 p.a.) does not reflect the opportunity cost of the plant's use (i.e. $20 p.a.). As a result, over the course of the asset's life, an amount of $100 would be charged as depreciation in A's financial statements even though the cost of maintaining the productive capacity of its asset would have notably increased. If Company A were to distribute all profits as dividends, it will not have the resources sufficient to replace its existing plant at the end of its useful life. Therefore, the use of historical cost may result in reporting profits that are not sustainable in the long term.

B. For most companies a physical inventory is necessary for every company regardless of what inventory method is being used. This will assist the company with accuracy and validation that the inventory reported on the financial statements is accurate and reliable. When using a perpetual inventory system, which has been set up with good controls, a company can take periodic inventory counts throughout the year and not only, or just, at year end. If further statistical sampling has been implemented at a high and confident level, then this could is essence eliminate having to perform a physical inventory count all together.

C. An Auditor may provide other types of services, reasonable assurance of accuracy of company's financial statements, to an organization. For cash receipts, an auditor may help management forecast the cash flow and accurate projections for subsequent year. He may also identify areas for improvement and make recommendations for short-term investment of excess cash.