Exam 3: Audit Reports

A lack of independence will override any other scope limitations and requires a disclaimer of opinion.

An auditor determines the financial statements include at least a material departure from GAAP.Which type of opinion may be issued?

The following is a portion of an adverse audit report issued for a public company.(Note: A separate report was issued on the effectiveness of internal control over financial reporting.) Independent Auditor's Report To the shareholders of Wallace Corporation We have audited the accompanying balance sheet of Wallace Corporation as of December 31, 2012, and the related statements of income, retained earnings, and cash flows for the year then ended.These financial statements are the responsibility of the company's management.Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion. The company has excluded from property and debt in the accompanying balance sheet certain lease obligations that, in our opinion, should be capitalized in order to conform with generally accepted accounting principles.If these lease obligations were capitalized, property would be increased by $14,500,000, long-term debt by $13,200,000, and retained earnings by $1,300,000 as of December 31, 2012, and net income and earnings per share would be increased by $1,300,000 and $2.25, respectively, for the year then ended. Required: Complete the above adverse audit report by preparing the opinion paragraph.Do not date or sign the report.

A CPA may wish to emphasize specific matters regarding the financial statements even though an unqualified opinion will be issued.Normally, such explanatory information is:

When a client fails to follow GAAP, the audit report can be unqualified, qualified, or adverse depending on the materiality.What factors affect materiality that an auditor should consider?

The following is the introductory paragraph, and the Basis for Qualified Opinion paragraph for Fast Times Corporation, a non-public company. Independent Auditor's Report To the shareholders of Fast Times Corporation We have audited the accompanying balance sheet of Fast Times Corporation as of September 30, 2012, and the related statements of income, retained earnings, and cash flows for the year then ended, and the related notes to the financial statements. Basis for Qualified Opinion We were unable to obtain audited financial statements supporting the company's investment in a foreign affiliate stated at $1,040,000, or its equity in earnings of that affiliate of $501,000, which is included in net income, as described in Note 14 to the financial statements.Because of the nature of the company's records, we were unable to satisfy ourselves as to the carrying value of the investment or the equity in its earnings by means of other auditing procedures. Required: Prepare the opinion paragraph for the above audit report.Do not date or sign the report.

Materiality is essential when an auditor considers his/her determination of the appropriate report for a given set of circumstances.

Describe the standard unqualified report to be issued for an audit of a private company.Begin by specifying the eight parts of the report, and then discuss the contents of each part.

Assume you are the partner in charge of the 2012 audit of Becker Corporation, a private company.The audit report has not yet been prepared.In each independent situation following (1-8), indicate the appropriate action (a-g)to be taken.The possible actions are as follows: a.Issue a standard unqualified report. b.Qualify both the scope and opinion paragraphs. c.Qualify the opinion paragraph. d.Issue an unqualified opinion with an explanatory paragraph. e.Issue an unqualified opinion with modified wording (no explanatory paragraph). f. Issue an adverse opinion. g.Disclaim an opinion. The situations are as follows: ________ 1.Becker Corporation carries its property, plant, and equipment accounts at current market values.Current market values exceed historical cost by a highly material amount, and the effects are pervasive throughout the financial statements. ________ 2.Management of Becker Corporation refuses to allow you to observe, or make, any counts of inventory.The recorded book value of inventory is highly material. ________ 3.You were unable to confirm accounts receivable with Becker's customers.However, because of detailed sales and cash receipts records, you were able to perform reliable alternative audit procedures. ________ 4.One week before the end of fieldwork, you discover that the audit manager on the Becker engagement owns a material amount of Becker's common stock. ________ 5.You relied upon another CPA firm to perform part of the audit.Although you were the principal auditor, the other firm audited a material portion of the financial statements.You wish to refer to (but not name)the other firm in your report. ________ 6.You have substantial doubt about Becker's ability to continue as a going concern. ________ 7.Becker Corporation changed its method of computing depreciation in 2012.You concur with the change and the change is properly disclosed in the financial statement footnotes. ________ 8.Ten days after the balance sheet date, one of Becker's buildings was destroyed by a fire.Becker refuses to disclose this information in a footnote to the financial statements, but you believe disclosure is required to conform with GAAP.The amount of the uninsured loss was material, but not highly material.

When other auditors are involved in the audit and they qualify their portion of the audit, the principal auditor must decide if the amount in question is material to the financial statements as a whole.

In the scope paragraph of the audit report issued for financial statements of a non-public company, the auditor expresses an opinion about the internal controls of the company.

The audit report date is the date the auditor completed audit procedures in the field.

The introductory paragraph of the auditor's report states that the auditor is responsible for the preparation, presentation and opinion on financial statements.

Auditors should issue a disclaimer of opinion when there is a highly material client-imposed scope restriction.

When the auditor determines that the financial statements are fairly stated, but there is a nonindependent relationship between the auditor and the client, the auditor should issue:

The final step in the auditor's decision process for audit reports is to write the audit report.

Discuss each of the five circumstances when an auditor would issue an unqualified audit report with an explanatory paragraph or modified wording.

Under AICPA auditing standards, the primary auditor issuing the opinion on the financial statements is called the:

Academic research is underway to study the effectiveness of communications provided by auditors in the audit report.

Auditing standards for public companies are established by the: