Roscoe & Jones, Ltd, a CPA firm in Silver Bell, Arizona, has completed the audit

Question

Roscoe & Jones, Ltd, a CPA firm in Silver Bell, Arizona, has completed the audit of the financial

statements of Excelsior Corporation as of, and for, the year ended December 31, 20X1.

Findings related to the financial statements and the audit include:

• Excelsior is a nonpublic company that presents only current-year financial statements.

• Roscoe was unable to perform normal accounts receivable confirmation procedures, but

alternate procedures were used to satisfy Roscoe as to the validity of the receivables.

• Excelsior Corporation is the defendant in litigation, the outcome of which is highly uncertain.

If the case is settled in favor of the plaintiff, Excelsior will be required to pay a

substantial amount of cash that might require the sale of certain assets. The litigation and

the possible effects have been properly disclosed in Note 11. Roscoe wishes to include

discussion of this matter in the audit report.

• During 20X1 Excelsior changed its method of accounting for long-term construction contracts

and properly reflected the effect of the change. Roscoe is satisfied with Excelsior’s

justification for making the change. The change is discussed in Note 12.

• Excelsior issued debentures on January 31, 20X1, 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, 20X1. Excelsior declined to disclose these data in the notes to the fi nancial

statements. Roscoe considers this a material but not pervasive omission.

• Roscoe gathered sufficient appropriate audit evidence as of February 10, 20X2, and

planned a report release date of February 16, 20X2.

Consider all facts given and prepare an auditors’ report in an acceptable and complete format,

incorporating any necessary departures from the standard report.

Explanation / Answer

Answer: To the Board of Directors and Stockholders of Excelsior Corporation

We have audited the accompanying consolidated financial statements of Excelsior Corporation and its subsidiaries, which comprise the consolidated balance sheet as of December 31, 20X1, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the year then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statement

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statement. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Roscoe & Jones, Ltd,

CPA firm

Silver Bell,

Arizona

December 31, 20X1.

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