Question

Assume you are in charge of the audit of Franklin Corporation’s 1995 financial statements. The audit report has not yet been prepared. In each independent situation following (1-8), indicate the appropriate action (a-g) to be taken. The possible actions are as follows:

a.         Issue a standard unqualified report.

b.         Qualify both the scope and opinion paragraph.

c.         Qualify the opinion paragraph.

d.         Issue an unqualified opinion with an explanatory paragraph.

e.         Issue an unqualified opinion wording (no explanatory paragraph).

f.          Issue an adverse opinion.

g.         Disclaim an opinion.

The situations are as follows:

________1.     Franklin Corporation carries its property, plant, and equipment accounts at                                  current market values. Current market values exceed historical cost by a highly             material amount and the effects are pervasive throughout the financial                                             statements.

________2.     Management of Franklin Corporation refuses to allow you to observe, or make,                  any accounts of inventory. The recorded book value of inventory is highly                                     material.

________3.     You were unable to confirm accounts receivable with Franklin’s customers.                                   However, because of detailed sales and cash receipts records, you were able to                         perform reliable alternative audit procedures.

________4.     One week before the end of fieldwork, you discover that the audit manager on                the Franklin engagement owns a material amount of Franklin’s common stock.

________5.     You relied upon another CPA firm to perform part of the audit of Franklin.                                   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.

________6.     You have substantial doubt about Franklin’s ability to continue as a going                           concern

_________7.   Franklin Corporation changed its method of computing depreciation in 1995;                                     you concur with the change, and the change is properly disclosed in the financial                   statement footnotes.

_________8.   Ten days after the balance sheet date, ne of Franklin’s building was destroyed by                fire. Franklin refuses to disclose this information in a footnote to the financial                    statements, but you believe disclosure is required to conform with generally                         accepted accounting principles. The amount of the uninsured loss was material,                        but not highly material.

Answer 1

Answer:

1. Issue an adverse opinion: The amount involved in this case is both material and pervasive throughout the Financial Statements.
2. Disclaim an opinion: When the limitation on scope is imposed by client, as a result the auditor is unable to obtain sufficient appropriate audit evidence, disclaimer opinion has to be issued.
3. Issue a standard unqualified report. Since reliable audit procedures can be performed and they are Sufficient and Appropriate, unqualified report can be issued.
4. Disclaim an opinion: When the auditor is not independent or when there is conflict of interest, Disclaimer opinion ha sto be issued.
5. Issue an unqualified opinion with a modification in wording (no explanatory paragraph).
6. Issue an Adverse Opinion. Because as per SA570 "Evaluating the Going Concern Assumption" - In the auditors judgement, if it is inappropriate that the Financial Statements are prepared based on the Going Concern assumption, then auditor should express an adverse opinion.
7. Issue Standard Unqualified Report with an Explanatory Paragraph. Because as per the Accounting standards, any change in the Accounting policy followed should be disclosed and form part of Financial Statements. Since it is properly disclosed in the given case, Unqualified report can be issued and mention it in the explanatory paragraph.
8. Qualify the opinion paragraph. Since the Uninsured loss was material but not pervasive and only they did not comply with GAAP, however the rest of Financial Statements are fairly presented.