Exam 3: Audit Reports

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

A company has changed its method of inventory valuation from an unacceptable one to one in conformity with generally accepted accounting principles. The auditor's report on the financial statements of the year of the change should include:

Users of the financial statements rely on the auditor's report because it provides absolute assurance the report provides.

Audit situations 1 through 10 present various independent factual situations an auditor might encounter in conducting an audit. List A represents the types of opinions the auditor ordinarily would issue, and List B represents the report modifications (if any) that would be necessary. For each situation, select one response from List A and one from List B. Select, as the best answer for each item, the action the auditor normally would take. Items from either list may be selected once, more than once, or not at all. Assume the following: • The auditor is independent • The auditor previously expressed an unqualified opinion on the prior-year financial statements unless otherwise noted • Only single-year (not comparative) statements are presented for the current year (unless otherwise stated) • The conditions for an unqualified opinion exist unless contradicted in the factual scenario • The conditions stated in the factual scenario are material • No report modifications are to be made except in response to the factual scenario Factual Scenario 1. The financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with GAAP. 2. In auditing the Long-Term Investments account, an auditor is unable to obtain audited F/S for an investee located in a foreign country. The auditor concludes that sufficient competent evidential matter regarding this investment cannot be obtained but it is not pervasive to the financials as a whole. 3. Due to recurring operating losses and working capital deficiencies the auditor has substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. However, the F/S disclosures are adequate. 4. The principal auditor decides to refer to the work of another auditor, who audited a wholly owned subsidiary of the entity and issued an unqualified opinion. 5. An entity issues F/S that present financial position and results of operations but omits the related statement of cash flows. Management discloses in the notes to the F/S that it does not believe the statement of cash flows to be useful. 6. An entity changes its depreciation method for production equipment from SL to units of production based on hours of utilization. The auditor concurs with the change, although it has a material effect on the comparability of the entity's F/S. 7. An entity is a defendant in a lawsuit alleging infringement of certain patent rights. However, management. cannot reasonably estimate the ultimate outcome of the litigation. The auditor believes that there is a reasonable possibility of a significant material loss, but the lawsuit is adequately disclosed in the notes to the F/S. 8. An entity discloses certain lease obligations in the notes to the F/S. The auditor believes that the failure to capitalize these leases is a departure from GAAP. 9. The entity wishes to show comparative F/S and include the prior year. However, the prior year F/S contained a qualification due to an inappropriate method of GAAP. Accordingly, management. corrected the prior year GAAP deficiency and included the updated numbers in the comparative financials for the current year. 10. The entity wishes to show comparative F/S and include the prior year. However, the prior year F/S were audited by another auditor who refuses to reissue his opinion.

Financial statement users are typically more concerned with an unqualified report with explanatory paragraphs than they are with a disclaimer of opinion.

Changes in an estimate, such as a change in the estimated useful life of an asset for depreciation purposes, affect consistency but not comparability, and therefore require an explanatory paragraph in the audit report.

If the phrase "except for" is present in the opinion paragraph of the audit report, the auditor has issued a(n):

An adverse opinion is issued when the auditor believes:

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

Auditing standards for public companies are established by the:

When an auditor is trying to determine how changes can affect consistency and/or compatibility, he should keep in mind that:

AICPA professional standards provide uniform wording for the auditor's report to enable users of the financial statements understand the audit report.

Which of the following statements is true? I. The auditor is required to issue a disclaimer of opinion in the event of a material uncertainty. II. The auditor is required to issue a disclaimer of opinion in the event of a going concern problem.

In the case of a disclaimer due to lack of independence, the entire scope paragraph is excluded from the report.

The introductory paragraph of the standard audit report states that the financial statements are:

An audit of historical financial statements most commonly includes the:

For the report containing a disclaimer for lack of independence, the disclaimer is in the:

A qualified report can take the form of a qualification of both the scope and the opinion or of the opinion alone.

If most or all users' decisions that are based on the financial statements are likely to be significantly affected, the materiality level is:

An audit report prepared by Garrett and Brown, CPAs, is provided below. The audit for the year ended December 31, 2012 was completed on March 1, 2013, and the report was issued to Javlin Corporation, a private company, on March 13, 2013. List any deficiencies in this report. Do not rewrite the report. We have examined the accompanying financial statements of Dalton Corporation as of December 31, 2012. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these statements based on our audit. We conducted our audit in accordance with generally accepted accounting principles. Those principles require that we plan and perform the audit to provide reasonable assurance about whether the financial statements are free of misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. We believe that our audit provides a reasonable basis for our opinion. In our opinion, except for the effects of not capitalizing certain lease obligations that should be capitalized in order to conform with generally accepted accounting principles, the financial statements referred to above present accurately the financial position of Jacob Corporation as of December 31, 2012, in conformity with accounting principles generally accepted in the United States of America. Garrett and Brown, CPAs March, 2013