Question

In-cla the appropriate report for each alternative materiality level): (1) Unmodified opinion-standard wording Unmodified opinion explanatory paragraph 3 Unmodified opinion-nonstandard report wording 14) Qualified opinion GAAP departure 15) Qualified opinion-scope limitation (6) Disclaimer (7) Adverse 3-26 (OBJECT 16 CONIECTIVES J-4,3-5, 3-6, 3-7, 3-8) For the following independent situations, assume that you are the audit partner on the engagement: 1. A number of frozen yogurt stores have opened in the last few years and your client, Discus Yogurtland, has experienced a noticeable decline in customer traffic over the past several months that has caused you to have substantial doubt about Yogurt Land's ability to continue as a going concern. 2. Intelligis Electronics is a manufacturer of advanced electrical components. During the year, changes in the market resulted in a significant decrease in the demand for their products, which are now being sold significantly below cost. Management re- fuses to write off the products or to increase the reserve for obsolescence. 3. In the last 3 months of the current year, Oil Refining Company decided to change direction and go significantly into the oil drilling business. Management recognizes that this business is exceptionally risky and could jeopardize the success of its exist- ing refining business, but there are significant potential rewards. During the short period of operation in drilling, the company has had three dry wells and no successes The facts are adequately disclosed in footnotes. Your client, Harrison Automotive, has changed from straight-line to sum-of-the- years' digits depreciation. The effect on this year's income is immaterial, but the effect in future years may be highly material. The change is not disclosed in the footnotes. Circumstances prevent you from being able to observe the counting of inventory at Brentwood Industries. The inventory amount is material in relation to Brentwood Industries' financial statements. But, you were able to perform alternative procedures to support the existence and valuation of the inventory at year-end. 16. Approximately 20 percent of the audit of Lumberton Farms, Inc., was performed by a different CPA firm, selected by you. You have reviewed their audit files and believe they did an excellent job on their portion of the audit. Nevertheless, you are unwilling to take complete responsibility for their work. For each situation, do the following: Identify which of the conditions requiring a deviation from a standard unmodified opinion audit report is applicable, if any. (b) State the level of materiality as immaterial, material, or highly material. If you cannot de- cide the level of materiality, state the additional information needed to make a decision. Based on AICPA question paper, American Institute of Certified Public Accountants. Chapter 31

Answer 1

1) (a) In the case of Yogurt Land because of Substantial doubt regarding the company's ability to continue in future a going concern Qualification shall be included in Auditors opinion paragraph in audit report. (b) It is material but it could be resolve by the management by counteract the problem. 2) (a) In this case of Intelligis Electronics there shall be Deviation from a Standard Unmodified opinion audit report. (b) It is material according to me as company did not followed the accounting framework and it could change the decision of the user of the financial statements. 5) (a) In case of Brentwood Industries there shall not be deviation from a standard unmodified opinion audit report as auditor were able to perform alternative procedures to support the existence and valuation of the inventory at year end. (b) It is material event as wrong or unable to perform valuation procedures of inventory could affect the decision of the user of the Financial Statement.