3-27 (Objectives 3-1, 3-2, 3-4, 3-6, 3-7) Patel, CPA, has completed the audit of

Question

3-27 (Objectives 3-1, 3-2, 3-4, 3-6, 3-7) Patel, CPA, has completed the audit of the financial statements of Bellamy Corporation as of and for the year ended December 31, 2011. Patel also audited and reported on the Bellamy financial statements for the prior year. Patel drafted the following report for 2011.

We have audited the balance sheet and statements of income and retained earnings of Bellamy Corporation as of December 31, 2011. We conducted our audit in accordance with generally accepted accounting standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of misstatement.

We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly the financial position of Bellamy Corporation as of December 31, 2011, and the results of its operations for the year then ended in conformity with generally accepted auditing standards, applied on a basis consistent with those of the preceding year.

Patel, CPA

(Signed)

Other Information

•   Bellamy is presenting comparative financial statements.

•   Bellamy does not wish to present a statement of cash flows for either year.

•   During 2011, Bellamy changed its method of accounting for long-term construction contracts and properly reflected the effect of the change in the current year’s financial statements and restated the prior year’s statements. Patel is satisfied with Bellamy’s justification for making the change. The change is discussed in footnote 12.

•   Patel was unable to perform normal accounts receivable confirmation procedures, but alternative procedures were used to satisfy Patel as to the existence of the receivables.

•   Bellamy Corporation is the defendant in a litigation, the outcome of which is highly uncertain. If the case is settled in favor of the plaintiff, Bellamy will be required to pay a substantial amount of cash, which might require the sale of certain fixed assets. The litigation and the possible effects have been properly disclosed in footnote 11.

•   Bellamy issued debentures on January 31, 2010, in the amount of $10 million. The funds obtained from the issuance were used to finance the expansion of plant facilities. The debenture agreement restricts the payment of future cash dividends to earnings after December 31, 2015. Bellamy declined to disclose this essential data in the footnotes to the financial statements.

Required

a.   Identify and explain any items included in “Other Information” that need not be part of the auditor’s report.

b.   Explain the deficiencies in Patel’s report as drafted.*

*AICPA adapted.

3-32 (Objectives 3-1, 3-2, 3-4) The following tentative auditor’s report was drafted by a staff accountant and submitted to a partner in the accounting firm of Better & Best, CPAs:

AUDIT REPORT

To the Audit Committee of American Broadband, Inc.

We have examined the consolidated balance sheets of American Broadband, Inc. and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of income, retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

Our audits were made in accordance with auditing standards generally accepted in the United States of America as we considered necessary in the circumstances. Other auditors audited the financial statements of certain subsidiaries and have furnished us with reports thereon containing no exceptions. Our opinion expressed herein, insofar as it relates to the amounts included for those subsidiaries, is based solely upon the reports of the other auditors.

As fully discussed in Note 7 to the financial statements, in 2011, the company extended the use of the last-in, first-out (LIFO) method of accounting to include all inventories. In examining inventories, we engaged Dr. Irwin Same (Nobel Prize winner 2009) to test check the technical requirements and specifications of certain items of equipment manufactured by the company.

In our opinion, the financial statements referred to above present fairly the financial position of American Broadband, Inc. as of December 31, 2011, and the results of operations for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

To be signed by Better & Best, CPAs

March 1, 2012

Required

A. Identify deficiencies in the staff accountant’s tentative report that constitute departures from the generally accepted standards of reporting.*

Explanation / Answer

Ans 3-27 The items which are included in Other Information that need not be part of auditor report:

The following are the items which is not necessary to include in the audit report.

1) Bellamy changed the accounting method for long term construction contracts and which is not included in his he report,so the auditor should make a footnote which mentions the change in method of accounting in audit report.

2) Presentation of comparative financial statement is not required in auditor's report.

3) The Bellamany Corporation litigation should not br disclosed in auditors report.

4) The confirmation procedure of accounts receivable are not released in audit report.

b) The following are the deficiencies in Patel's audit report:

1) The report does not include the date when the audit report was issued and there is no appropriate title.

2) The audit report is presented in form of compartive financial statements which is related to the finanicial statement of current year.

3) The report does not include intoductory paragraph which tells about the role and responsibities of management neither it discloses the scope of any paragraph independently.

4) The audit report does not contain any material misstatement.

5) There is inconsistency in application Generally accepted audit standards.

6) The opinion paragraph is there but for previous year.

7) The auditor should have qualified report on not dicslosing the cash flow statement.

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