Qustion : . For the past five years, Clark CPAs has audited the financial statem
ID: 2427000 • Letter: Q
Question
Qustion :
. For the past five years, Clark CPAs has audited the financial statements of a manufacturing company. During this period, the audit scope was limited by the client as to the observation of the annual physical inventory. Because Clark CPAs considers the inventories to be material and was not able to satisfy the audit requirements by using other auditing procedures, the firm was unable to express an unmodified opinion on the financial statements in each of the five years.
The CPA was allowed to observe physical inventories for the current year ended December 31, 2015, because the client’s bank would no longer accept the audit reports. However, to minimize audit fees, the client requested that the CPA not extend audit procedures to the inventory as of the beginning of the year, January 1, 2015. Which type of audit report would you suggest be issued this year and why?
Note:
I have the answer, could you please paraphrase it ?
The answer is:
The scope of the audit has been restricted by inability to assess the inventory. Based on the information,this appears to be highly material or material, depending upon the auditor's preliminary judgment about materiality. Because the auditor was unable to obtain sufficient appropriate evidence on the beginning inventories, it would be necessary to issue either a qualified or disclaimer of opinion on the income statement and statement of cash flows as well as the beginning of the balance sheet. The choice of a qualified or disclaimer opinion would depend upon materiality. If highly material, then a disclaimer is the best choice. If material, then a qualified scope and opinion might be more appropriate. An unqualified opinion could be issued for the current period balance sheet.
Explanation / Answer
The CPA should be qualified opinion based on his observations though the scope of audit has been restricted by client not allowing CPA to do physical verification of the same. As the auditor was unable to obtain sufficient appropriate evidence on the beginning inventories, it would be appropriate for CPA to issue either a qualified or disclaimer of opinion on the income statement and statement of cash flows as well as the beginning of the balance sheet. The choice of a qualified or disclaimer opinion would depend upon materiality of report being issues if it is highly material, then a disclaimer is the best choice. An unqualified opinion could be issued for the current period balance sheet.
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