Question

For each of the following independent situations, indicate the reason for and the type of financial statement audit report that you would issue. Assume that all companies mentioned are private companies and that each item is at least material.

a.	Thibodeau Mines, Inc., uses LIFO for valuing inventories held in the United States and FIFO for inventories produced and held in its foreign operations.
b.	Walker Computers is suing your client, Super Software, for royalties over patent infringement. Super Software's outside legal counsel assures you that Walker's case is completely without merit.
c.	In previous years, your client, Merc International, has consolidated its Panamanian subsidiary. Because of restrictions on repatriation of earnings placed on all foreign-owned corporations in Panama, Merc International has decided to account for the subsidiary on the equity basis in the current year. You concur with the change.
d.	In prior years, Worcester Wool Mills has used current market prices to value its inventory of raw wool. During the current year, Worcester changed to FIFO for valuing raw wool.
e.	Upon review of the recent history of the lives of its specialized automobiles, Gas Leak Technology justifiably changed the service lives for depreciation purposes on its autos from five years to three years. This change resulted in a material amount of additional depreciation expense.
f.	During the audit of Brannon Bakery Equipment, you found that a material amount of inventory had been excluded from the company's financial statements. After discussing this problem with management, you become convinced that it was an unintentional oversight. Management appropriately corrected the error prior to your finalization of field work.
g.	Jay Rich, CPA, holds 10 percent of the stock in Rothenburg Construction Company. The board of directors of Rothenburg asks Rich to conduct its audit. Rich completes the audit and determines that the financial statements present fairly in accordance with generally accepted accounting principles.
h.	Ramamoorthi Savings and Loan's financial condition has been deteriorating for the last five years. Most of its problems result from loans made to real estate developers in Saint Johns County. Your review of the loan portfolio indicates that there should be a major increase in the loan-loss reserve. Based on your calculations, the proposed write-down of the loans will put Ramamoorthi into violation of the state's capital requirements. The client refuses to make the adjustment or to disclose the possible going concern issue in the notes to the financial statements.

Answer 1

	Type of financial statement audit report	Reason
(a).	Standard unqualified audit report	Because there is no any such issue because a company have option to use any suitable method of inventory valuation.
(b).	Standard unqualified audit report	This does not affect this company hence we need not disclose any such uncertainties.
(c).	Modified standard unqualified audit report with an explanatory paragraph	Modified standard unqualified audit report with an explanatory paragraph will be suitable because changes made to equity basis due to restrictions and these changes will be acceptable.
(d).	Modified standard unqualified audit report with an explanatory paragraph	Modified standard unqualified audit report with an explanatory paragraph will be suitable because changes made to inventory valuation and such changes will be acceptable.
(e).	Standard unqualified audit report	Changes in the service lives for depreciation purposes on its autos from five years to three years are justifiable hence standard unqualified audit report will be suitable.
(f).	Standard unqualified audit report	Standard unqualified audit report should be issued because as per information of he question, it is given that errors was unintentional and management also took corrective actions.
(g).	Qualified audit report including a disclamier of opinion	Qualified audit report including a disclamier of opinion should be issued because Jay Rich, CPA, holds 10 percent of the stock in Rothenburg Construction Company hence independence of auditor can not be maintained and it will lead to very severe problems.
(h).	Adverse audit report	Adverse audit report should be issued because there is a major increase in the loan-loss reserve and the proposed write-down of the loans will put Ramamoorthi into violation of the state's capital requirements. Apart from this client also refused to make the adjustment or to disclose the possible going concern issue in the notes to the financial statements. That is why Adverse audit report should be issued.