For each of the following independent situations, assume that any amounts would

Question

  For each of the following independent situations, assume that any amounts would be material.

      (I) Indicate the TYPE of appropriate audit report; A. unqualified, B. qualified or adverse, C. qualified

            or disclaimer, D. Disclaimer, E. Qualified only, or F. Other. INDICATE the situation involved, i.e.

          “Accounting situation”, and DISCUSS the situation.

     (II) State whether an explanatory paragraph would be included, and if so, what would be included in

          the explanatory paragraph.

    (III) For an UNQUALIFIED auditor’s report, if the wording would be changed, indicate how it would be

          Changed.

1. In auditing the long-term investments account (company uses the equity method for this

     investment), an auditor is unable to obtain audited financial statements for an investee located in a

     foreign country.

2. The status of the client as a going concern is extremely doubtful. The matter is disclosed in the

     footnotes.

3. The staff member of the CPA firm doing the audit of ABC Company has a financial interest in ABC

    Company.

4. Part of the audit is being performed by another CPA firm. In the auditors’ report, the Principle

     Auditor (Group Engagement Auditor) decides to make reference to the Other Auditor (Component

     Auditor).

5. The company changes from Double-declining-balance to The Straight-line method for depreciation of

      fixed assets. The auditor agrees with the reason for the change in accounting method.

6. The CPA firm was not able to observe or take part in the taking of the company’s physical inventory.

     The company uses the periodic inventory system to value inventory.

7. The company refuses to include a Statement of Cash Flows with the financial statements.

     Management feels that the Income   Statement should be the users’ focus.

8. In reporting the dollar amount for land, the client company uses historic cost, rather than a more

     recent appraiser’s estimate of the land’s current value.   

Explanation / Answer

1) The Auditor should obtain an understanding of the  professional competence and independence of the other auditor. Furthermore, the auditor may not express an unmodified opinion when a long-term investment is material unless he has obtained sufficient appropriate evidence about the investment. The inability to obtain audited statements of a long-term investee is a common scope limitation that precludes an unmodified opinion.

2) Disclaimer of Opinion .By itself, a substantial doubt about an entity's ability to continue as a going concern does not require a modification of the opinion paragraph. Hence, a qualified opinion would be inappropriate. However, nothing precludes the auditor from disclaiming an opinion in these circumstances.

3)

A covered member cannot have a direct financial interest in the client.

Rule 101: independence; violation

4) Unqualified Report. If the principal auditor is able to satisfy himself as to the independence and professional reputation of the other auditor and takes steps he considers appropriate to satisfy himself as to the audit performed by the other auditor (see paragraph .12), he may be able to express an opinion on the financial statements taken as a whole without making reference in his report to the audit of the other auditor. If the principal auditor decides to take this position, he should not state in his report that part of the audit was made by another auditor because to do so may cause a reader to misinterpret the degree of responsibility being assumed.

5) Changes in accounting and financial reporting are inevitable. Most happen because in preparing periodic financial statements, companies must make estimates and judgments to allocate costs and revenues. Other changes arise from management decisions about the appropriate accounting methods for preparing these statements.

When changes are necessary, it’s up to CPAs to decide how to reflect them in the financial reporting process. In 2005, FASB revisited the issue and made significant revisions to its guidance on how to treat certain changes. The result was Statement no. 154, Accounting Changes and Error Corrections, which superseded APB Opinion no. 20, Accounting Changes. Statement no. 154 is effective for fiscal years ending after December 15, 2006. This article discusses the changes Statement no. 154 brought about as well as the practical implementation issues companies and their auditors will face

6) A Standard UnQualified Report will suffice.

7) Qualified Report.

8) A Standard UnQualified Report will suffice.

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