Question

3) (6 marks) The following are two unrelated situations. For each situation, outline possible deviations (if any) from an unmodified auditor's report that may be necessary and give reasons. State your assumptions.

A) Queen Lake Construction Ltd. uses an aggressive revenue recognition policy under the percentage of completion method for long-term construction contracts. Your review of this year's contracts indicates that several projects look as if they will be high in revenue for the first two years and then have negligible earnings for the next three years.

Answer 1

Facts of the case

The company, Queen Lake Construction Ltd, uses an AGGRESSIVE REVENUE RECOGNITION policy. Due to its aggressive policy its contract revenue in the initial couple years is UNREASONABLY HIGH and then it goes VERY VERY LOW for the next three years.

Relevant law

If the financial statements are materially misstated, it is a VIOLATION OF THE GAAP. Due to this a QUALIFIED issue would be issued.

Conclusion and result

Since the revenues are OVERSTATED it means the financial statements are HIGHLY OVERSTATED. This means that this is a violation of the GAAP. Accordingly a qualified opinion shall be issued and the amounts shall be disclosed