Use the accompanying solution sheet to reply to the eight situations below that
ID: 2722237 • Letter: U
Question
Use the accompanying solution sheet to reply to the eight situations below that relate to the audit of financial statements of nonpublic companies. Unless indicated otherwise, assume that material amounts are involved. Situations:
1. A company has departed from GAAP but the departure is not material.
2. A company's inventory records were deficient and the auditor was required to satisfy herself that the inventory was properly stated using alternative procedures. She is satisfied that she has sufficient appropriate evidence.
3. In auditing a client, an auditor has determined that substantial doubt exists about an entity's ability to continue as a going concern. The client has appropriately disclosed this matter.
4. A group auditor decides not to take responsibility for the work of the component auditor who audited a 70% owned subsidiary and issued an unmodified opinion. The total assets and revenues of the subsidiary are 5% and 8%, respectively, of the total assets and revenues of the entity being audited.
5. A company changes from FIFO to LIFO for inventory valuation and the auditor concurs with the change. The change has a material effect on the comparability of the entity's financial statements this year, but is expected to have an immaterial effect in the future.
6. Inadequate record retention policies by the client have resulted in a situation in which a CPA is unable to obtain sufficient appropriate audit evidence with respect to a material account.
7. A CPA has decided to emphasize in the audit report that the company she audited is a component of XYZ Company, its parent.
8. A client has changed its estimate of likely doubtful accounts from 2% of credit sales to 3%. The auditor believes the change to be reasonable.
Reply as to the type of opinion and other modification to the audit report as follows:
Types of opinion
A. Adverse
B. Disclaimer
C. Qualified
D. Unqualified
Other Modifications:
EOM Add an emphasis of matter paragraph
OM Add other matter paragraph
BFM Add a basis for modification paragraph
OTHER Make modification other than adding an additional paragraph
NONE Make no modifications
If more than one type of opinion is appropriate list each—one with "Report 1" and one with "Report 2." If only one is approp
Explanation / Answer
1. Unqualified , as the departure from GAAP is stated immaterial.
2. EOM. Refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor's judgment, is of such importance that it is fundamental to users' understanding of the financial statements.
3.OM.in the auditor’s report pertaining to matter other then those presented or disclosed in the financial statements and in auditor’s judgement it is necessary to bring the other matter to user’s attention by giving necessary details.
4. Disclaimer to that extent in the audit Report.
5. EOM as FIFO to LIFO method of inventory valuation is going to have a material impact in the financial statements in the current year.
6. Disclaimer as auditor is unable to express an opinion due to insufficient audit evidence as a result of inadequate record retention.
7.OM
8. None
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