Question

uestion 36

A manager is explaining to a staff auditor how various situations might affect the audit opinion. For each of the following scenarios, identify the appropriate reporting option by matching the scenario with the opinion type from the list provided. Assume that any financial statement effect is material, unless otherwise noted and that US auditing standards are followed.

The scope of the auditor’s examination is affected by conditions that preclude the application of a necessary auditing procedure it IS very material and pervasive to the financial statements.

The financial statements are affected by an alternative accounting treatment that is a departure from GAAP. The use of GAAP would cause the statements to be misleading.

The company changed its method of accounting for long-term construction contracts, but management was justified in making the change. The new method is acceptable under GAAP, and the change was accounted or prospectively.

The company changed its method of valuing inventory, but management did not have appropriate justification for the change. The change is properly disclosed in the financial statements but is material and pervasive to the overall financial statements.

The auditor wishes to emphasize the acquisition of newly acquired companies

A. Unqualified B. Unqualified with Explanatory Language C. Disclaimer D. Adverse

Answer 1

1.The scope of the auditor’s examination is affected by conditions that preclude the application of a necessary auditing procedure it IS very material and pervasive to the financial statements

Answer 1. DISCLAIMER OF OPINION - as the auditor is unable to obtain sufficient and appropriate audit evidence to provide a basis for audit opinion.

2.The financial statements are affected by an alternative accounting treatment that is a departure from GAAP. The use of GAAP would cause the statements to be misleading.

Answer 2. unqualified opinion with explanatory statement.

3.The company changed its method of accounting for long-term construction contracts, but management was justified in making the change. The new method is acceptable under GAAP, and the change was accounted or prospectively.

Answer 3. Unqualified opinion

4.The company changed its method of valuing inventory, but management did not have appropriate justification for the change. The change is properly disclosed in the financial statements but is material and pervasive to the overall financial statements.

Answer 4. Adverse opinion as the financial statements does not give a true and fair view.

5. The auditor wishes to emphasize the acquisition of newly acquired companies

Answer 5. Unqualified opinion with explanation.