Question

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 fi- nancial 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 proce- dures for accounts that are material, but not pervasive, to the financial state- ments. 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 and explain any items included in “Other Information” that need not be part of the auditor’s report.

Explain the deficiencies in Patel’s report as drafted.*

Answer 1

The items included in “other information” that whether it should be part of the auditor’s report or not are enumerated below

·         The firm bellamy has presented comparative financial statements , which need not be part of auditor’s report

·         The audit report should reflect the acquisition of Stockard inc and its transaction in the current year in its report

·         The accounts receivable confirmation is material but not pervasive and auditor’s could not confirm it. It should state the same in the audit report as qualified opinion. A qualified opinion is issued when audit evidence cannot be obtained when the evidence is material but not pervasive

·         The contingent liability in which there is high possibility that bellamy will lose the case and have to pay the amount by selling its fixed assets and not disclosed. This should be reported in auditors report . this not disclosure in financial statements will amount to misstatement

The deficiencies in Patel report

• Report title Auditing standards require that the report be titled and that the title includes the word independent. But the above audit report does not mention about that
• Audit report address The report is usually addressed to the company, its stockholders, or the board of directors. But the above report does not address this issue

·         Introductory paragraph does not include financial statements of cash flow statements which should a part of audit and that the statements are the responsibility of management and that the auditor's responsibility is to express an opinion on the statements based on an audit.

• The scope of audit report should mention Discussion of the audit evidence accumulated but did not mention the non confirmation accounts receivable balances in its audit report and its qualified opinion on the same
• Audit report date is not mentioned