Question

      For each of the following independent situations, assume that any amounts would be material.

      (I) Indicate the TYPE of appropriate audit report; A. unqualified, B. qualified or adverse, C. qualified

            or disclaimer, D. Disclaimer, E. Qualified only, or F. Other. INDICATE the situation involved, i.e.

          “Accounting situation”, and DISCUSS the situation.

     (II) State whether an explanatory paragraph [i.e. PCAOB audit] would be included, and if so,

          what would be included in the explanatory paragraph.

    (III) For an UNQUALIFIED auditor’s report, if the wording would be changed, indicate how it would be

           Changed [Relates to Shared Report].

    (iv) The auditor agrees to any accounting change, if the change is proper GAAP.

1. In auditing the long-term investments account (company uses the equity method for this

     investment), an auditor is unable to obtain audited financial statements for an investee located in a

     foreign country.

2. The status of the client as a going concern is extremely doubtful. The matter is disclosed in the

     footnotes.

3. The partner of the CPA firm doing the audit of ABC Company has a financial interest in ABC

    Company.

4. “The auditor, having obtained sufficient appropriate audit evidence, and having concluded that

      misstatements, individually or in the aggregate, are material but not pervasive to the financial

      statements”, would issue what opinion.   See CPA Exam materials.

5. Part of the audit is being performed by another CPA firm. In the auditors’ report, the Principle

     Auditor (Group Engagement Auditor) decides to make reference to the Other Auditor (Component

     Auditor).

6. The company changes from First-in, First –out (FIFO) to Last-in, Current-knowledge (LIKE) for

     inventory valuation.

7. The CPA firm was not able to observe or take part in the taking of the company’s physical inventory.

     The company uses the periodic inventory system to value inventory; perpetual inventory records are

     not available.

8. The company refuses to include a Statement of Cash Flows with the financial statements.

    Management feels that the Income   Statement should be the users’ focus.

9. The company uses an appraiser’s estimate of current Replacement Cost to report the value of

     previously acquired land owned by the company. It is felt this is more recent information

10. The controller requested that the auditor not send accounts receivable confirmations to its largest

        customers. The auditors used alternative procedures to ascertain the existence of the receivables

11. The company uses Lower of Cost or Market rather than Historic Cost to value inventory.

       It is felt that this is more recent information.

Answer 1

In accordance with HOMEWORKLIB RULES, where the question contains more than 4 parts we are required to answer the first 4 parts of the question. Accordingly the first 4 parts of the question have been answered as follows :

First of all, I would like to explain the meanings of qualified, unqualified and disclaimer of an opinion on the basis of which the question has been answered :

a) Qualified opinion : Qualified opinion is passed when the financial statements are not free from material statements and they do not represent a true & fair view of the affairs of the company.

b) Unqualified opinion : Unqualified opinion is passed when the financial statements are free from material statements and they do represent a true & fair view of the affairs of the company.

c) Disclaimer : Disclaimer of an opinion is passed when the auditor has been unable to collect sufficient and appropriate evidence so as to warrant the expression of an opinion.

1. Part A : Long-term Investment

In the current scenario, the auditor will issue disclaimer of an opinion as the auditor has not been able to obtain the audited financial statements of one of the subsidiary, the amount of which is material (as assumed in the question).

2. Part B : Status of going concern being extremely doubtful

Where status of going concern are extremely doubtful, the financial statements would be prepared accordingly. The auditor might pass an unqualified, qualified or disclaimer of an opinion depending on the facts. An explanatory paragraph would be required to be added explaining that the status of going concern is extremely doubtful due to whatsoever reason and hence the financial statements have been prepared keeping in mind that the business is to be closed within the next 12 months.

3. Part C : Partner doing audit has an interest in the company :

In such a case, the audit firm is not eligible to undertake the audit of such company. Hence the audit firm should immediately resign from being the auditors of such company.

4. Part D : Opinion on financial statements containing misstatements which are material but not pervasive :

Qualified opinion would be passed in case of a financial statements containing misstatements which are material but not pervasive. If the misstatements had been material and pervasive, an adverse opinion would have been passed.