Question

In: Accounting

For each of the following brief scenarios, assume that you are the CPA reporting on the...

For each of the following brief scenarios, assume that you are the CPA reporting on the client’s financial statements. Match the type of opinion that best fits the circumstance. Note slight differences, such as when a misstatement is pervasive or the fact pattern indicates pervasiveness. Do not read more into the circumstance than what is presented. Unless stated otherwise, assume that the information presented is material to the financial statements.

A.

ADVERSE

B.

UNQUALIFIED PLUS ADDITIONAL LANGUAGE

C.

DISCLAIMER

D.

UNQUALIFIED

Your client has declined to depreciate its assets this year because the depreciation expense would reduce the year’s small income to a loss and the dollar amount is pervasive.

A client’s financial statements follow GAAP, but you wish to emphasize that the client is a subsidiary of Webster Corporation in the audit report.

In auditing the long-term investments account of a new client, you are unable to obtain audited financial statements for the investee located in a foreign country. You conclude that sufficient appropriate audit evidence regarding this investment cannot be obtained and the investment value is pervasive to the total assets.  

Due to a very major lawsuit, you have substantial doubt about a client’s ability to continue as a growing concern for a reasonable period of time. The financials statement disclosure related to this lawsuit are adequate.    

You decide not to take responsibility for the work of the component auditors who audited a 70% owned subsidiary and issued an unmodified opinion. The total assets and revenues of the subsidiary are 5% and 8%, respectively, of the total assets and revenues of the entity being audited.  

You decide to take responsibility for the work of the component auditors who audited a 70% owned subsidiary and issued an unmodified opinion. The total assets and revenues of the subsidiary are 5% and 8*, respectively, of the total assets and revenues of the entity being audited.    

A company has changed the remaining life of a significant asset from 12 to 10 years. You believe that the change is reasonable.  

A company changes from FIFO to LIFO for inventory valuation and you concur with the change. The change has an immaterial effect on the entity’s financial statements this year, but it is expected to have a material effect in the future.   

Your client is a defendant in a major lawsuit. It is probably that the company will experience a material loss due to the lawsuit, although it is impossible to calculate the likely amount. The financial statements include a note adequately describing the matter. You decide that a standard report is inappropriate.

Predecessor auditors audited last year’s financial statements and you audited the current year. You have decided not to ask the predecessor to reissue the audit report. Comparative financial statements are being issued on the two years.

Solutions

Expert Solution

Scenarios (Circumstance)

Opinion

Remarks
1 A. Adverse Opinion Since company has not fulfilled depreciation accounting & disclosure requirements, therefore it is having material impact on financial statements. Hence adverse opinion by the auditor is to be expressed in the audit report.
2 B. Unqualified plus additional language Although company has complied with GAAP but auditor wants to emphasize client being a subsidiary of Webster corporation therefore unqualified opinion plus additional language is appropriate.
3 C. Disclaimer Opinion Since auditor is unable to obtain sufficient & appropriate audit evidence for giving opinion on the financial statements, therefore Disclaimer opinion in the auditor report is to be expressed.
4 D. Unqualified Opinion Since Company has complied with disclosure requirements relating to going concern, therefore unqualified opinion is appropriate.
5 B. Unqualified Opinion plus additional language As per SA 600, If auditor is using the work of another auditor (Eg. Component auditors in respect to subsidiaries financial information forming part of client's financial statements), then auditor has to mention the statement of responsibily of component auditors for subsidiaries financial information included in the financial statements of the financial statement. Therefore unqualified opinion plus additional language is appropriate in this regard.
6 D. Unqualified opinion Since auditor has undertaken responsibility in regard of subsidiaries financial information forming part of client's financial statements, therefore no separate requirement for additional language. hence unqualified opinion is appropriate.
7

D. Unqualified opinion

Company has changed the accounting estimate in regard to asset's useful life which is reasonable, therefore unqualified opinion is appropriate provided company has properly disclosed the fact in the notes to accounts.

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