Question

You are currently employed as partner in United & Party LLC, an accounting firm. The following three different audits were performed by your team for the year ended December 31, 2018:

Peoples Shelter, a non-profit organization. Except for salaries and allowances, the company has not kept vouchers or receipts for more than 60 per cent of its expenses.

Jack Holdings, Inc. Jack Holdings is a major construction company. Jack Holdings also purchases large vacant blocks of land that it later subdivides for the construction of houses and units to compensate for the irregularity of its contracted building projects. These are then sold on its own account. Your evidence strongly shows that the apportionment of costs to houses and units sold has been kept low in order to boost profits. In your opinion, this has resulted in the overvaluation of the unsold properties. The directors of the company do not agree and maintain that the stock of properties is correctly valued.

Vacation Dreamland Ltd. Vacation Dreamland booked a major German group to perform in selected cities in the U.S.A. The contract required that Vacation Dreamland should pay the group in US dollars but, to reduce costs, it did not hedge the amounts. Subsequent to year end, the German Mark fell against the US dollar and a substantial loss relating to the group’s tour was expected. The management of Vacation Dreamland tried unsuccessfully to renegotiate the band’s contract and was not able to obtain finance to cover the expected shortfall. Vacation Dreamland cancelled the tour and expects a substantial claim from the German group. Your analysis indicate that Vacation Dreamland does not have the income, cash or other assets to sustain such a loss.

Required:

Assuming that all amounts involved are material, identify:

The most likely auditor’s opinion that you would issue on each financial report for the year ending December 31, 2018 and

Discuss the justifications for each of the opinions.

Answer 1

1. In the case of people shelters, a non profit organizations, it is not possible for the auditor to vouch for more than 60% of expenses. This, in such a case auditor should issue disclaimer of opinion citing complete accounting records have not been maintained by the people shelter.

2. In the case of Jack holdings inc. audit report with adverse opinion should be issued. An audit report with adverse opinion is issued when financial records are not in accordance with generally accepted accounting principle and are grossly misstated . In the present case jack holdings is engaged in construction work . Apportionment of costs to houses and units by jack holding has been kept low in order to boost profit and also stock of unsold properties is overvalued. It shows not only it's financial records are not in accordance with generally accepted accounting principles but their grossly misstated .

3 . In the case of vacation Dreamland , an audit report with qualified opinion may be issued. An audit report with qualified audit opinion is issued when financial records are not presented in accordance with generally accepted accounting principle . Further if there is any material weakness or defeciency in internal controls then also it can be issued. In the present case there is nothing wrong with the financial records of vacation Dreamland limited but there is material weakness in internal controls as management has not hedged it's exposure just to save expenses and no one questioned management's such a risky decision. That's why I'm this case audit report with unqualified audit report can be issued.