Exam 19: Audit Reports on Financial Statements

PA firm has been auditing Big Manufacturing Company (BMC) for several years. Last year, BMC converted its inventory and purchasing systems to a new system effective December 31, the date of the year-end. To their horror, the PA firm discovered at the beginning of the current year that there was a cutoff error in the accounts payable system of $25 million dollars LAST YEAR. Neither the client nor the firm had detected that the purchases of December 31 had been omitted from the old computer system transaction processing and had been recorded only in the new computer system, understating last year's expenses. Last year's financial statements have been restated and the error disclosed in the notes to both last year's and this year's financial statements. What type of audit opinion will BMC receive this year?

If a misstatement is immaterial relative to the financial statements of the entity for the current period and is not expected to have a material effect in future periods, it is appropriate to issue

Publicly listed organizations and those using IFRS (International Financial Reporting Standards) must have audit reports that use the comparative financial statements approach. This means that the auditor reports on

It is management's responsibility to select the accounting policies that are used in the preparation of the financial statements. What is the auditor's responsibility with respect to these accounting policies?

The "unqualified report with explanatory paragraph" or the "unqualified report with modified wording"

The auditor's report of the Samcorp Company indicates that the auditor is unable to form an opinion on whether the financial statements of the company are fairly presented due to scope restrictions and unavailable and incomplete records. The auditor's report

When Dussault & Montgomery relies on Groves & Padden, another PA firm, to audit the Quebec subsidiaries of one of their audit clients, Dussault & Montgomery should

The client has presented all required financial statements with the exception of the statement of cash flows. The auditor has completed the audit and is satisfied that everything, with the exception of the missing statement, is presented fairly. As a result, the auditor would likely issue

The new IAASB Auditors report, is effective for audits and will be mandatory for listed companies for audits with year ending

Mafah Distribution Limited has requested that the audited financial statements be completed by January 5, five days after the December 31 year-end. This means that the auditor will be unable to verify subsequent payments on accounts receivable and will be unable to determine whether accounts payable have been set up correctly. What type of audit report should Mafah receive if the auditor is unable to use alternative procedures for these two audit areas?

Analyze the "Auditor Responsibility Section" of the standard Independent Auditor's Report. Explain the intended purpose of the sentences in this section.

The primary concern in measuring materiality when a client has failed to follow an acceptable financial reporting framework is usually

The most common type of audit report contains

Management has several responsibilities that are important to the auditor. One of these is that management is responsible for

When determining whether an exception is highly material, the extent to which the exception affects different parts of the financial statements must be considered. This is referred to as

Your client has experienced a major data breach with lawsuits and fines pending of significant and uncertain amounts. These events are disclosed in the client's financial statements and are clearly explained in the notes. How do these events affect the independent auditor's report?

The following are two unrelated situations. For each situation outline possible deviations (if any) from a standard auditor's report that may be necessary and give reasons. State your assumptions. A) During 2015, your client was sued by a customer who had a serious car accident as a result of scrap metal that had been dumped in the parking lot. The customer drove over the scrap metal, which became embedded in the tires of her vehicle. The tires blew and the car went out of control on a major highway. The amount in dispute is $400 000, with estimated legal bills of about $20 000. The client does not wish to disclose the suit in the financial statements. B) During the current year, your client leased a large amount of equipment. As the lease qualifies as a capital lease, the equipment has been recorded as an asset, with the corresponding liabilities recorded on the financial statements. The implicit interest rate in the lease is 7 percent. The annual payments due over the terms of the lease have been disclosed in the notes to the financial statements.

An adverse opinion is issued when the auditor believes

Your client, Huge Telephone Company (HTC), has encountered troubled times, due to deregulation. There is competition for local telephone business and long distance telephone business. The high speed lines for internet access provided via the telephone network have not been selling as well as expected. A new quirk is that many large cities are going to provide free wireless services by installing wireless transmitters on telephone poles, and is only offering to pay a pittance for the use of the telephone poles. HTC has been able to retain reasonable profits by cutting staff to a bare minimum and outsourcing many services. However, due to several labour contracts and federal legislation that will increase services, you have doubts about the ability of the company to renew a major bond issue this coming year. Required: How does the above information affect the audit report?

ProForce Inc. is facing a large lawsuit from its employees. The contingency is significant and may lead to a going concern issue if ProForce is found guilty. ProForce took the adequate measures, as prescribed by IFRS (International Financial Reporting Standards), to account, disclose, and present the contingency in the financial statements. The auditor should