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In: Accounting

For each of the following independent situations, assume that any amounts would be material. (I) Indicate...

For each of the following independent situations, assume that any amounts would be material.

(I) Indicate the TYPE of appropriate audit report; A. unqualified,

B. qualified or adverse, C. qualified or disclaimer,

D. Disclaimer, E. Qualified only, or F. Other.

INDICATE the situation involved, i.e. Accounting situation,

and DISCUSS the situation.

(II) State whether an explanatory paragraph would be included, and

if so, what would be included in the explanatory paragraph.

1. Gelato Bros., Inc. leases its manufacturing facility from a

partnership controlled by the chief executive officer and major

shareholder of Gelato. Your review of the lease indicates that

the rental terms are in excess of similar buildings in the area.

The company refuses to disclose this related-party transaction

in the footnotes.

Type ____ Include Explanatory paragraph? _____

Discussion If Yes, Discuss YES or NO

2. The company uses lower of cost or market, rather than Historic

Cost to value inventory. It is felt this is more recent

information

Type ____ Include Explanatory paragraph? _____

Discussion If Yes, Discuss YES or NO

3. The company changes from Average Cost to First-in, first-out for

inventory valuation. The auditor agrees with the reason for the

change.

Type ____ Include Explanatory paragraph? _____

Discussion If Yes, Discuss YES or NO

Solutions

Expert Solution

Case 1
The auditor will issue a qualified or adverse opinion . The lease rental terms are more than  
that for similar building in the area . The company refuses to disclose and recognise the related party
transaction. Thus the Financial statements are not prepared as per GAAP and an explanatory paragraph will
be required for the same to inform the stakeholders of such a transaction and the impact on the financial statements
Case 2
In this case the auditor will express an unqualifed opiniom without any explanatory paragraph . The company as adopted the
correct method of valuation as per GAAP for inventory
Case 3
A change in the method of valuation to FIFO from Average Cost will require an explanatory paragraph stating the reason
forsuch change and the impact of the change on the profit and the financial statements. The auditor will express an
unqualified opinion as he agrees with such a change

ekkarill92 answered 2 years ago
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