In: Accounting
Question
Assume you are the partner in charge of the 2019 audit of BHP Corporation, a private company. The audit report has not yet been prepared.
Requirements:
In each independent situation following (1-8), indicate the appropriate action (A-E) to be taken. The possible actions are as follows:
Issue an unmodified opinion audit report.
Issue an unqualified opinion with an emphasis of matter/other matter paragraph.
Issue a qualified opinion audit report.
Issue an adverse opinion.
Disclaim an opinion.
The situations are as follows:
1. BHP Corporation carries its property, plant, and equipment
accounts at current market values. Current market values exceed
historical cost by a highly material amount, and the effects are
pervasive throughout the financial statements.
2. Management of BHP Corporation refuses to allow you to observe,
or make, any counts of inventory. The recorded book value of
inventory is highly material.
3. You were unable to confirm accounts receivable with BHP's
customers. However, because of detailed sales and cash receipts
records, you were able to perform reliable alternative audit
procedures.
4. One week before the end of fieldwork, you discover that the
audit manager on the BHP engagement owns a material amount of BHP's
common stock.
5. You relied upon another CPA firm to perform part of the audit.
Although you were the principal auditor, the other firm audited a
material portion of the financial statements. You wish to refer to
(but not name) the other firm in your report.
6. You have substantial doubt about BHP's ability to continue as a
going concern.
7. BHP Corporation changed its method of computing depreciation in
2019. You concur with the change and the change is properly
disclosed in the financial statement footnotes.
8. Ten days after the balance sheet date, one of BHP's buildings
was destroyed by a fire. BHP refuses to disclose this information
in a footnote to the financial statements, but you believe
disclosure is required to conform with GAAP. The amount of the
uninsured loss was material, but not highly material.
+)KN z21c Answer
The appropriate actions to be taken in each independent situation are:
1. As per Generally Accepted Accounting Principles(GAAP), property, plant, and equipment accounts should be valued at cost less accumulated depreciation less impairment loss, if any. Here, in this case, BHP Corporation carries its property, plant, and equipment accounts at current market values. Current market values exceed historical cost by a highly material amount, and the effects are pervasive throughout the financial statements.
In this situation, the auditor should issue an adverse opinion since the misstatement is both pervasive and material. When an audit report with an adverse opinion is issued, it indicates that the firm’s financial records do not conform to GAAP. Adverse opinions are detrimental to companies because it implies wrongdoing or unreliable accounting practices.
2. Where inventory is material to the Financial statements, the auditor should design and perform audit procedures in such a way as to enable him/her obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base his/her opinion in accordance with SA 500/501 “Audit Evidence”. Here, in this case, Management of BHP Corporation refuses to allow the auditor to observe, or make, any counts of inventory. The recorded book value of inventory is highly material.
In this situation, the auditor should disclaim his opinion since the recorded book value of inventory is highly material and auditor is unable to obtain sufficient appropriate audit evidence about the existence of the inventory to give a unqualified opinion.
3. When the auditor is unable to confirm accounts receivable by audit procedure of external confirmation, he should perform alternate audit procedure to verify the recorded book value of accounts receivable. Here, the auditor is unable to confirm accounts receivable with BHP's customers. However, because of detailed sales and cash receipts records, you were able to perform reliable alternative audit procedures.
In this situation, the auditor should issue a standard unqualified report since he is able to confirm the account receivables by performing reliable alternative audit procedures, i.e., checking detailed sales and cash receipts records.
4. When an audit manager owns a material amount of auditee’s common stock, it poses a threat to the independence that is required to conduct the audit. If such interest is material to the party, and the audit client can exercise significant influence over the other entity, no safeguards could reduce the threat to an acceptable level.
In this situation,
the auditor should disclaim his opinion since one
week before the end of fieldwork, you discover that the audit
manager on the BHP engagement owns a material amount of BHP's
common stock because is not independent to conduct the
audit.
5. According to “International Standard on Auditing 600” provide guidance when an auditor, reporting on the financial statements of an entity, uses the work of another auditor on the financial information of one or more components included in the financial statements of the entity.
Here, in this case, the auditor relied upon another CPA firm to perform part of the audit. Although the auditor is the principal auditor, the other firm audited a material portion of the financial statements. The auditor wish to refer to (but not name) the other firm in his report. The auditor should Issue an unqualified opinion with modified wording (no explanatory paragraph) to mention the name of the other CPA firm.
6. If, after considering identified conditions and events and management's plans, the auditor concludes that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time remains, the audit report should include an explanatory paragraph (following the opinion paragraph) to reflect that conclusion. The auditor's conclusion about the entity's ability to continue as a going concern should be expressed through the use of the phrase "substantial doubt about it (the entity's) ability to continue as a going concern”
7. Any change in the method of depreciation implies a change in accounting estimate. Thus, there should be valid reasons for a change in method of depreciation. Such change should be accounted properly as per GAAP. BHP Corporation changed its method of computing depreciation in 2019. The auditor should Issue an unqualified opinion with an explanatory paragraph indicating that the method of computing depreciation has been changed during the year and the change is properly disclosed in the financial statement footnotes.
8. International accounting standard 10, “Events after The Reporting Period” contains requirements for when events after the end of the reporting period should be adjusted in the financial statements. Adjusting events are those providing evidence of conditions existing at the end of the reporting period, whereas non-adjusting events are indicative of conditions arising after the reporting period (the latter being disclosed where material).
Here. In this case , ten days after the balance sheet date, one of BHP's buildings was destroyed by a fire, this is a non-adjusting event as providing evidence of conditions were not existing at the end of the reporting period. It should be disclosed in a footnote to the financial statements. BHP refuses to disclose this information in a footnote to the financial statements, but you believe disclosure is required to conform with GAAP. The amount of the uninsured loss was material, but not highly material. Thus, auditor should qualify the opinion paragraph.