Question

Patel, CPA, has completed the audit of the financial statements of Bellamy Corporation as of and for the year ended December​ 31, 2016. Patel also audited and reported on the Bellamy financial statements for the prior year. Patel drafted the following report for 2016:

We have audited the balance sheet and statements of income and retained earnings of Bellamy Corporation as of December​ 31, 2016. We conducted our audit in accordance with generally accepted accounting standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of misstatement.

We believe that our audits provide a reasonable basis for our opinion.

In our​ opinion, the financial statements referred to above present fairly the financial position of Bellamy Corporation as of December​ 31, 2016, and the results of its operations for the year then ended in conformity with generally accepted auditing​ standards, applied on a basis consistent with those of the preceding year.

​Patel, CPA

​(Signed)

Other Information

•	Bellamy is a private corporation and is presenting comparative financial statements.
•	During​ 2016, Bellamy acquired Stockard Inc. and the effects of that transaction are reflected in the current year financial statements. Information about this transaction is disclosed in footnote 12.
•	Patel was unable to perform normal accounts receivable confirmation procedures for accounts that are​ material, but not​ pervasive, to the financial statements.​ Unfortunately, Patel was not able to perform alternative procedures to support the existence of the receivables.
•	Bellamy Corporation is the defendant in litigation where there is a reasonable possibility that Bellamy may be required to pay a substantial amount of​ cash, which might require the sale of certain fixed assets. Because management does not want to provide any information that the plaintiff might use against​ Bellamy, the case is not discussed in the financial statements.
•	Bellamy issued debentures on January​ 31, 2015, in the amount of​ $10 million. The funds obtained from the issuance were used to finance the expansion of plant facilities. The debenture agreement restricts the payment of future cash dividends to earnings after December​ 31, 2020. Bellamy has disclosed this in the footnotes to the financial statements.

Identify ​which of the ​following 15 items are deficiencies in​ Patel's report as drafted:

1. There is no separate scope paragraph that describes what an audit is. Two required sentences are completely​ omitted: "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."

2. The audit was made in accordance with auditing standards generally accepted in the United States of America rather than generally accepted accounting standards.

3. The opinion paragraph states that accounting principles were consistent with those used in the prior year. The opinion paragraph should make no reference to consistency.

4. There is no separate introductory paragraph that states the financial statements​ audited, dates, and the responsibilities of management and the auditor.

5. There is no mention in the report that Bellamy is a private corporation.

6. The opinion should be qualified rather than being unqualified.

7. The word material is excluded from the scope paragraph​ (free of material​ misstatement).

8. An additional paragraph should be included which describes the dividend restrictions and the refusal of the client to present a statement of cash flows.

9. There is no mention in the report that Bellamy Corporation is a defendant in a litigation.

10. The opinion paragraph excludes the required​ phrase, "in all material​ respects."

11. There are comparative​ statements, but the audit report identifies and deals with only the current​ year's financial statements. An opinion must also be included for the prior period financial statements.

12. The balance sheet is as of a specific​ date, whereas the income statement and the statement of retained earnings are for a period of time. The scope paragraph should identify the period of time.

13. The opinion paragraph includes the words​ "generally accepted auditing​ standards" rather than the phrase​ "accounting principles generally accepted in the United States of​ America."

14. The audit report is neither addressed nor dated and it does not contain a title.

15. A separate paragraph should be included stating that generally accepted accounting principles were not consistently applied.

Answer 1