ACC 403 Week 2 ,
- The annual audit of Midwestern Manufacturing revealed that sales were accidentally being recorded as revenue when the goods were ordered, instead of when they were shipped. Assuming the amount in question is material and the client is unwilling to correct the error, the CPA should issue:
- An unqualified opinion or adverse opinion.
- A qualified “except for” opinion or disclaimer of opinion.
- A qualified “expect for” opinion or adverse opinion.
- An unqualified opinion with an explanatory paragraph
- Under which of the following circumstances would a disclaimer of opinion not be appropriate?
- The auditor is unable to determine the amounts associated with an employee fraud scheme.
- Management does not provide reasonable justification for a change in account principles.
- The client refuses the auditor permission to confirm certain accounts receivable or apply alternative procedures to verify their balances.
- The chief executive officer is unwilling to sign the management representation letter.
- The opinion paragraph of a CPA’s reports states: “ In our opinion, except for the effects of not capitalizing certain lease obligations, as discussed in the preceding paragraph, the financial statements present fairly, in all material respects…” This paragraph expresses a(n)
- Unqualified opinion
- Unqualified opinion with explanatory paragraph
- Qualified opinion
- Adverse opinion
3-28 For the following independent situations, assume that you are the audit partner on theengagement:
- During your audit of Raceway.com, Inc., you conclude that there is a possibility that inventory is materially overstated. The client refuses to allow you to expand the
scope of your audit sufficiently to verify whether the balance is actually misstated.
- You complete the audit of Munich Department Store, and in your opinion, the financial statements are fairly presented. On the last day of the field work, you discover that one of your supervisors assigned to the audit has a material investment in Johnson.
- Auto Delivery Company has a fleet of several delivery trucks. In the past, Auto Delivery had followed the policy of purchasing all equipment. In the current year, they decided to lease the trucks. The method of accounting for the trucks is therefore changed to lease capitalization. This change in policy is fully disclosed in footnotes.
- You are auditing Deep Clean Services for the first time. Deep Clean has been in business for several years but over the last two years has struggled to stay afloat given the economic conditions. Based on your audit work, you have substantial doubt that Deep Clean will be in business by the end of its next fiscal year.
- One of your audit clients has a material investment in a privately-held biosciences company. Your audit firm engaged a business valuation specialist to assist in evaluating the client’s estimation of the investment’s fair value. You conclude that the valuation specialist’s work provides sufficient appropriate audit evidence.
- Four weeks after the year-end date, a major customer of Prince Construction Co. declared bankruptcy. Because the customer had confirmed the balance due to Prince at the balance sheet date, management refuses to charge off the account or otherwise disclose the information. The receivable represents approximately 10% of accounts receivable and 20% of net earnings before taxes.
For each situation, do the following:
- Identify which of the conditions requiring a modification of or a deviation from an unqualified standard report is applicable.
- State the level of materiality as immaterial, material, or highly material. If you cannot decide the level of materiality, state the additional information needed to make a decision.
- Given your answers in parts a and b, state the type of audit report that should be issued. If you have not decided on one level of materiality in part b, state the appropriate report for each alternative materiality level.
|Because the client refuses to|
|allow the auditor to expand|
|the scope of his audit, a|
|disclaimer of opinion is|
|appropriate rather than a|
|Scope of the audit||qualified as to scope and|
|1 has been restricted||Highly material||Disclaimer||opinion.|
|Lack of independence by|
|audit personnel on the|
|2||Lack of||a disclaimer for lack of|