Question

17-38 For each of the following brief scenarios, assume that you are reporting on a client’s current year financial statements. Reply as to the type or types of opinion possible in the circumstance.

                S              Unmodified – Standard

                U             Unmodified with emphasis-of-matter or other-matter paragraph

                Q             Qualified

                D             Disclaimer

                A             Adverse

Since more than one report may be possible in several of the circumstances, a second “opinion” column is added for each circumstance. In certain cases, you will not need to use the second column. Do not read more into the circumstance than what is presented, and do not consider the possibility of an auditors’ discretionary emphasis-of-matter paragraph being added to the audit report. Unless stated otherwise, assume that the information presented is material to the financial statements. If the situation doesn’t tell you whether a misstatement pervasively misstates the financial statements or doesn’t list a characteristic that indicates pervasiveness, two reports may be possible.

Situation                                                                                                                                              Opinion                                Opinion

1.A company in its first year of existence values its inventory at current replacement cost.                                                                                                                    Although you believe that the inventory costs do not approximate any GAAP inventory                                                                                                                     valuation method. The difference involved is material, but not pervasively                                                                                                                                                   to the financial statements.

2. Due to recurring operating losses and working capital deficiencies, you                                                                                                                                                  have substantial doubt about an entity’s ability to continue as a going                                                                                                                                                 concern for a reasonable period of time. The notes to the financial                                                                                                                                                     statements adequately disclose the substantial doubt situation.

3. You have discovered that a client made illegal payoffs to a candidate for                                                                                                                                         president of the United States. You are unable to determine the amounts                                                                                                                                    associated with the payoffs because of the client’s inadequate record                                                                                                                                                       retention policies. The client has added a note to the financial statements                                                                                                                                                    to describe this information, and has stated that the amounts of the payments                                                                                                                                           are not determinable.

4. In auditing the long-term investments account of a new client, you find that                                                                                                                                             a 2,000,000 contingent liability exists that is material to the consolidated                                                                                                                                        company. It is probable that this contingent liability will be resolved with a                                                                                                                                                 material loss in the future. Although, no adjusting entry has been made, the                                                                                                                                                 client has provided a note to the financial statements that describes the                                                                                                                                                    matter in detail and includes the $2 million estimate.

5. A client is issuing two years of comparative financial statements. The first                                                                                                                                         year was audited by other auditors who are not being asked to reissue their                                                                                                                                                  audit report.

6. An entity changes its depreciation method for production equipment from                                                                                                                                              the straight line to the units-of-production method based on hours of                                                                                                                                             utilization. You concur with the change.

7. A client has changed the method it uses to calculate postemployment                                                                                                                                             benefits from one acceptable method to another acceptable method.                                                                                                                                                          The effect of the change is immaterial this year, but is expected to be                                                                                                                                                      material in the future.

8. Component auditors have audited a subsidiary of your client as part of a                                                                                                                                             group audit. You have decided to rely upon the component auditors’ work.

9. A client omits note disclosure related to significant accounting policies                                                                                                                                                    that the auditors believe to be fundamental to users’ understanding of the                                                                                                                                                financial statements.

10. A client does not count its year-end inventory. The auditors are unable to                                                                                                                                       obtain sufficient appropriate audit evidence related to the inventory, and they                                                                                                                                        consider inventory to represent an extremely substantial proportion of the                                                                                                                                         financial statements.

                               

Answer 1

Opinions :