Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
Several independent audit situations are presented here
Several independent audit situations are presented here. Assume that everything other than what is described would have resulted in an unqualified opinion.
Required
Indicate the type of opinion you believe should be expressed in each situation, and explain your choice. If an explanatory paragraph is needed, indicate whether it should precede or follow the opinion paragraph.
a. The auditor was unable to obtain confirmations from two of the client's major customers that were included in the sample. These customers wrote on the confirmation letters that they were unable to confirm the balances because of their accounting systems. The auditor was able to become satisfied by other audit procedures.
b. The client treated a lease as an operating lease, but the auditor believes it should have been accounted for as a capital lease.The effects are material.
c. The client changed from FIFO to LIFO this year.The effect is material. Assume:
1. The change was properly accounted for, justified, and disclosed.
2. The change was properly accounted for and disclosed, but was not properly justified.
d. The client restricted the auditor from observing the physical inventory. Inventory is a material item.
e. The client is engaged in a product liability lawsuit that is properly accounted for and adequately described in the footnotes. The lawsuit does not threaten the going concern assumption, but an adverse decision by the court could create a material obligation for the client.
f. The status of the client as a going concern is extremely doubtful. The problems are properly described in the footnotes.
g. One of your client's subsidiaries was audited by another audit firm, whose opinion was qualified because of a GAAP violation.You do not believe that the GAAP violation is material to the consolidated financial statements on which you are expressing an opinion.
h. You are convinced that your client is violating another company's patent in the process of manufacturing its only product.The client will not disclose this, because it does not want to wave a red flag and bring this violation to the other company's attention.
i. The client, with reasonable justification, has changed its method of accounting for depreciation for all factory and office equipment.The effect of this change is not material to the current year financial statements, but is likely to have a material effect in future years. The client's management will not disclose this change because of the immaterial effect on the current-year statements.You have been unable to persuade management to make the disclosure.
Expert Solution
Audit opinions:
a. CPA was able to satisfy him/herself that the company amounts were reasonable. Opinion can remain unqualified.
b. Qualified opinion - not in compliance with GAAP (generally accepted accounting principles) - stating the financial effect of the departure.
c. 1. Qualified opinion referenced to the footnote for further disclosure. 2. I don't understand what 'not properly justified' means, but assume that the report would state the reason why the change was not properly justified, in addition to referring the reader to the footnote.
d. Disclaimer of opinion due to the unknown material effects of any change to the inventory asset. This is a scope limitation imposed by the client.
e. Qualified opinion: If the contingency obligation has been properly recorded and disclosed including a statement as to whether the loss of the litigation would be probable or possible, the qualified opinion of the type that says 'except for any unknown effects...'. Refer the reader to the footnote in the report.
f. Disclaimer of opinion or possibly an adverse, depending on the circumstances. Disclaimer would probably be adequate which says the company is not a going concern and the reader should understand that.
g. Unqualified opinion due to a lack of materiality even though there is a GAAP departure.
h. Adverse opinion although in the real world, the CPA would probably withdraw from the engagement and therefore no opinion would be expressed at all because the CPA's name would not be associated with the financial statements of the company.
i. Disclaimer of opinion: the reader of a financial statement needs to understand if a current year transaction will affect another accounting period. The outcome would be different if the client was willing to disclose the information in a footnote. The opinion is based solely on the financial activity for the current year, but this lack of disclosure poses a scope limitation which therefore leads to a disclaimer. It's an odd situation, but as a CPA, I would stand my ground on this issue.
Opinions are generally three parts long: first paragraph examines the scope of the audit, second paragraph lists any qualifications, and the third paragraph is the opinion.
One more comment in general about opinions. That is exactly what they are and not all CPAs would come to the same conclusion about identical facts. Auditing is not as black and white as some other aspects of the accounting field; Enron being a notable example.
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
