Question

In: Accounting

Complete problem below. List a represents the types of opinions the auditor ordinarily would issue and...

Complete problem below. List a represents the types of opinions the auditor ordinarily would issue and List B represents the report modifications [if any] that would be necessary. Select as the best answer for each situation [items 1 to 6] the type of opinion and modifications, if any, the auditor would normally select. The types of opinions in List A and the report modifications in List B may be selected once, more than once, or not at all.

Problem:

Items 1 through 6 present various independent factual situations an auditor might encounter in conducting an audit. For each situation assume:

Assume:

The auditor is independent.

The auditor previously expressed an unqualified opinion on the prior year’s financial statements.

Only single-year (not comparative) statements are presented for the current year.

The conditions for an unqualified opinion exist unless contradicted in the factual situations.

The conditions stated in the factual situations are material.

No report modifications are to be made except in response to the factual situation.

Situations:

In auditing the long-term investments account, an auditor is unable to obtain audited financial statements for an investee located in a foreign country. The auditor concludes that sufficient appropriate audit evidence regarding this investment cannot be obtained.

Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. However, the financial statement disclosures concerning these matters are adequate.

A principal auditor decides to take responsibility for the work of another CPA who audited a wholly owned subsidiary of the entity and issued an unqualified opinion. The total assets and revenues of the subsidiary represent 17 percent and 18 percent, respectively, for the total assets and revenues of the entity being audited.

An entity issues financial statements that present financial position and results of operations but omits the related statement of cash flows. Management discloses in the notes to the financial statements that it does not believe that statement of cash flows to be a useful financial statement.

An entity changes its depreciation method for production equipment from straight-line to a units-of-production method based on hours of utilization. The auditor concurs with the change, although it has a material effect on the comparability of the entity’s financial statements.

An entity discloses certain lease obligations in the notes to the financial statements. The auditor believes that the failure to capitalize these leases is a departure from generally accepted accounting principles.

Required:

List A represents the types of opinions the auditor ordinarily would issue and List B represents the report modifications (if any) that would be necessary. Select as the best answer for each situation (items 1 through 6) the type of opinion and modifications, if any, the auditor would normally select. The types of opinions in List A and the report modifications in List B may be selected once, more than once, or not at all.
(AICPA, adapted)

List A

List B

Types of Opinions

Report Modifications

A. An "except for" qualified opinion

H. Describe the circumstances in a explanatory paragraph preceding the opinion paragraph without modifying the three standard paragraphs.

B. An unqualified opinion

I. Describe the circumstances in an explanatory paragraph following the opinion paragraph without modifying the three standard paragraphs.

C. An adverse opinion

J. Describe the circumstances in an explanatory paragraph preceding the opinion paragraph, and modify the opinion paragraph.

D. A disclaimer of opinion

K. Describe the circumstances in an explanatory paragraph following the opinion paragraph, and modify the opinion paragraph.

E. Either an "except for" qualified opinion or an adverse opinion.

L. Describe the circumstances in an explanatory paragraph preceding the opinion paragraph, and modify the scope and opinion paragraphs.

F. Either a disclaimer of opinion or an "except for" qualified opinion.

M. Describe the circumstances in an explanatory paragraph following the opinion paragraph, and modify the scope and opinion paragraphs.

G. Either an adverse opinion or a disclaimer of opinion

N. Describe the circumstances within the scope paragraph without adding an explanatory paragraph.

O. Describe the circumstances within the opinion paragraph without adding an explanatory paragraph.

P. Describe the circumstances within the scope and opinion paragraphs without adding an explanatory paragraph.

Solutions

Expert Solution

Sl No Situation Item to be selected
1 In auditing the long-term investments account, an auditor is unable to obtain audited financial statements for an investee located in a foreign country. The auditor concludes that sufficient appropriate audit evidence regarding this investment cannot be obtained. Where an auditor is unable to obtain necessary information of an investee located in a foreign ,it limits the scope to conduct an auditor. In this case the auditor has to issue either a disclaimer of opinion or an "except for" qualified opinion. It will be based on the auditors judgement whether a disclaimer will be sufficient or a qualified opinion has to be issused based on facts the situation.
The options in the list are : F, L
2 Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. However, the financial statement disclosures concerning these matters are adequate. If the auditor has substantial doubts for the entity to continue as going concern, he will issue an un unqualified opinion. He has to highlight the reasons which led him to this conclusion in the paragraph immediately after the opinion paragraph.
The options in the list are : B,I
3 A principal auditor decides to take responsibility for the work of another CPA who audited a wholly owned subsidiary of the entity and issued an unqualified opinion. The total assets and revenues of the subsidiary represent 17 percent and 18 percent, respectively, for the total assets and revenues of the entity being audited. Where the principal auditor takes on the responsibility of another auditor , the report should not indicate that the work was carried on by another auditor. As such the principal auditor will issue an unqalified opinion.
The options in the list are : B
4 An entity issues financial statements that present financial position and results of operations but omits the related statement of cash flows. Management discloses in the notes to the financial statements that it does not believe that statement of cash flows to be a useful financial statement. Omiting statement of cash flows represents a departure from the US GAAP and is considered material although it is not considered indicating material misstatement. As such the auditor has to issue a qualified opinion before the opinion paragraph.
The options in the list are : A,J
5 An entity changes its depreciation method for production equipment from straight-line to a units-of-production method based on hours of utilization. The auditor concurs with the change, although it has a material effect on the comparability of the entity’s financial statements. The auditor in this situation agrees to the change in the accounting method adopted by the entity, the consistency principal is not followed. Here he has to issue an unqualified opinion without any modification to the opinion paragraph.
The options in the list are : B,I
6 An entity discloses certain lease obligations in the notes to the financial statements. The auditor believes that the failure to capitalize these leases is a departure from generally accepted accounting principles Departure from GAAP results in issue of a qualified or an adverse opinion. Whether it is adverse or a qualified will suffice will depend on the facts of the case. The same has to be mentioned in the paragraphs preceding the opinion paragraph.
The options in the list are : E,J

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