Chapter 15 For each of the following independent situations, assume that any amo

Question

Chapter 15 For each of the following independent situations, assume that any amounts would be material. (0) 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.Con notes Shipon the explanatory paragraph. Changed [Relates to Shared Report). () State whether an explanatory paragraph would be included, and if so, what would be included in (I) For an UNQUALIFIED auditor's report, if the wording would be changed, indicate how it would be 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 partner of the CPA firm doing the audit of ABC Company has a financial interest in ABC Company. 4. The company uses Lower of Cost or Market rather than Historic Cost to value inventory. It is felt that this is more recent information. 5.)Part of the audit is being performed by another CPA firm. In the auditors' repo Auditor (Group Engagement Auditor) decides to make reference to the Other Auditor (Component Auditor). 6. The company changes from First-in, First-out (FiFO) to Average Cost for inventory valuation. 7. 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. 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. in come Balance 8. 9. The company uses an appraiser's estimate of current Replacement Cost to report the value cf previously acquired land owned by the company. It is felt this is more recent information

Explanation / Answer

1) The Auditor should obtain an understanding ofthe  professionalcompetence and independence of the other auditor. Furthermore, theauditor may not express an unmodified opinion when a long-terminvestment is material unless he has obtained sufficientappropriate evidence about the investment. The inability to obtainaudited statements of a long-term investee is a common scopelimitation that precludes an unmodified opinion.

2) Disclaimer of Opinion .By itself, a substantial doubt about an entity'sability to continue as a going concern does not require amodification of the opinion paragraph. Hence, a qualified opinionwould be inappropriate. However, nothing precludes the auditor fromdisclaiming an opinion in these circumstances.

3)

A covered member cannot have a direct financial interest in theclient.

Rule 101: independence; violation

4) Unqualified Report. If theprincipal auditor is able to satisfy himself as to the independenceand professional reputation of the other auditor and takessteps he considers appropriate to satisfy himself as to the auditperformed by the other auditor (see paragraph .12), he may be ableto express an opinion on the financial statements taken as a wholewithout making reference in his report to the audit of the otherauditor. If the principal auditor decides to take this position, heshould not state in his report that part of the audit was made byanother auditor because to do so may cause a reader to misinterpretthe degree of responsibility being assumed.

5) Changes in accounting andfinancial reporting are inevitable. Most happen because inpreparing periodic financial statements, companies must makeestimates and judgments to allocate costs and revenues. Otherchanges arise from management decisions about the appropriateaccounting methods for preparing these statements.

When changes are necessary, it’s up to CPAs to decide how toreflect them in the financial reporting process. In 2005, FASBrevisited the issue and made significant revisions to its guidanceon how to treat certain changes. The result was Statement no.154, Accounting Changes and ErrorCorrections, which superseded APB Opinion no.20, Accounting Changes. Statement no. 154 iseffective for fiscal years ending after December 15, 2006. Thisarticle discusses the changes Statement no. 154 brought about aswell as the practical implementation issues companies and theirauditors will face

6) A Standard UnQualified Report will suffice.

7) Qualified Report.

8) A Standard UnQualified Report will suffice.

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