chapter3 ta

5/26/2018 Chapter3 TA

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Standard Unqualified report

Independent auditor's report1) Title

- independent

To the stockholders of ABC company 2) Addressee

- group that hires auditor generally not management

We have audited the accompanying balance sheet

of ABC corporation as of December 31, 19x4, and

the related statement of income, retained earnings

and cash flows for the year then ended. These

financial statements are the responsibility of the

company's management. Our responsibility is to

express an opinion on these statements based on our

audit.

3) Introductory paragraph

- we have audited

- list financial statements

- indicated management's responsibility

- indicated auditor's responsibility

We conducted our audit in accordance with

generally accepted auditing standards. Those

standards require that we plan and perform the audit

to obtain reasonable assurance about whether the

financial statements are free of material

misstatement. An audit includes examining, on a test

basis, evidence supporting the amounts and

disclosures in the financial statements. An audit

includes assessing the accounting principles used

and significant estimates made by management, as

well as evaluating the overall financial statement

presentation. We believe that our audit provides a

reasonable basis for our opinion.

4) Scope paragraph

- GAAP

- reasonable assurance statements are free of material

misstatement

- examining on a test basis evidence supporting

amounts and disclosures

- assessing accounting principles used and significant

estimates made, as well as evaluating overall

presentation

- audit provides a reasonable basis for our opinion

In our opinion, the financial statements referred to

above present fairly, in all material respects, the

financial position of ABC corporation as of

December 31, 19x4, and the results of its operations

and its cash flows for the year then ended inconformity with generally accepted accounting

principles.

5) opinion paragraph

- in our opinion

- present fairly, in all material respects

- in conformity with generally accepted accounting

anderson and zinder, p.c., cpas 6) signature

- firm

march 5, 19x5 7) date

- end of fieldwork


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Unqualified report modifications (1)(Shared report) Reports involving other auditorIntroductory paragraph

... We did not audit the financial statements of ABC company a wholly owned

subsidiary, which statements reflect total assets of 2,500,000 as of December 31,

19x4 and total revenues of 6,500,000 for the year then ended. Those statements

were audited by other auditors whose report has been furnished to us, and our

opinion, insofar as it relates to the amounts included for ABC company, is based

solely on the report of the other auditors.

add 2 sentences at end of paragraph

- did not audit entity (name)

- dollar amounts (absolute or percent)

- audited by other auditors

- our opinion is based on report of other

auditor

Scope paragraph

... We believe that our audit and the report of other auditorsprovide a reasonable

basis for our opinion.

modify last sentence of paragraph

- our audit and report of other auditors

provide reasonable basis

opinion paragraph

In our opinion, based on our audit andthe report of other auditors, the

consolidated financial statements referred to above ...

modify first sentence of paragraph

- our opinion is based on our audit and

report of other auditors

Unqualified report modifications (2)Substantial doubt about going concern

Explanatory paragraph

the accompanying financial statements have been prepared assuming that ABC

company will continue as a going concern. as discussed in note y to the financial

statements, ABC company has suffered recurring losses from operations and has net

capital deficiency that raises substantial doubt about the company's ability to continue

as a going concern. Managements plans in regard to these matters are also describe

in note y. the financial statements do not include any adjustments that might result

from the outcome of this uncertainty.

add an explanatory paragraph after opinion

- financial statements prepared assuming

going concern

- circumstances have risen that raise

substantial doubt about going concern

- refer to management footnote

- financial statements do not include

adjustments

Note: this explanatory paragraph is used if the auditor believes the audit client will not continue for at least one more year. the

auditor can also issue a disclaimer.

Unqualified report modifications (3)Lack of consistent application of generally accepted accounting principles

explanatory paragraph

as discussed in note v to the financial statements, the company changed its method of

computing depreciation in 19x1.

add a one sentence explanatory paragraph

after opinion


- note item

Unqualified report modifications (4) Change in previously issued opinionExplanatory paragraph

In our report dated march 1, 19x4, we expressed an opinion that the 19x3 financial

statements did not fairly present financial position, results of operations, and cash

flows in conformity with generally accepted accounting principles because of a

departure from such principles. The company carried its property, plant, and

equipment at appraisal values, and provided for depreciation on the basis of such

values. As described in note x, has changed its method of accounting for these items

and restated its 19x3 financial statements to conform with generally accepted

accounting principles. Accordingly, our present opinion on the 19x3 financial

statements, as presented herein, is different form the expressed in our previous report.

add an explanatory paragraphbefore

opinion

- date of report

- opinion expressed

- circumstances causing change in opinion

- updated opinion different


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Unqualified report modifications (5)Predecessor auditor's report not presentedIntroductory paragraph

We have audited the balance sheet of ABC Company as of December 31, 20X2,

and the related statements of income, retained earnings, and cash flows for the year

then ended. These financial statements are the responsibility of the Company's

management. Our responsibility is to express an opinion on these financial

statements based on our audit.The financial statements of ABC Company as of

December 31, 20X1, were audited by other auditors whose report dated March

31, 20X2, expressed an unqualified opinion on those statements.

[Same second paragraph as the standard report]

In our opinion, the 20X2 financial statements referred to above present fairly,

in all material respects, the financial position of ABC Company as of December 31,

20X2, and the results of its operations and its cash flows for the year then ended in

conformity with accounting principles generally accepted in the United States of

America.

Add sentence to end of introductory

paragraph

- last yearsstatements audited by other

auditors

- date of report

- opinion expressed

Modify first sentence of opinion

paragraph

-the 20X2financial statements.

Unqualified report modifications (6)Emphasis of a matter


as discussed in note x to the financial statements, the company has had numerous

dealings with businesses controlled by, and people who are related to, the officers of

the company.

add an explanatory paragraph after opinion


- note item

Unqualified report modifications (7) U.S only (Rule 203)Auditor agrees with a departure from promulgated accounting principle

explanatory paragraph

as described in note q, in may 19xx, the company exchanged shares of its common

stock for $5,060,000 of its outstanding public debt. the fair value of the common

stock issued exceeded the carrying amount of the debt by $466,000, which has been

shown as an extraordinary loss in the 1987 statement of operations. because a

portion of the debt exchanged was convertible debt, a literal application of statement

of financial accounting standards no. 84"induced conversions of convertible debt,"

would have resulted in a further reduction in net income of $3,611,000, which

would have been offset by a corresponding $3,611,000 credit to additional paid in

capital; accordingly, there would have been no net effect on stockholders'

investment. in the opinion of company management, with which we agree, a literal

application of accounting literature would have resulted in misleading financial

statements that do not properly portray the economic consequences of the exchange.

add an explanatory paragraph before or

after opinion


- discuss non-GAAP item

- management believes and we concur that

literal application would result in misleading

financial statements


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Qualified reports

Qualified (1)-- scope limitation

Scope paragraph

except as discussed in the following paragraph, ...

modify first sentence of scope paragraph

- except


we were unable to obtain audited financial statements supporting the company's

investment in a foreign affiliate stated at $250,000 at December 31, 19x4 or its

equity in earnings of that affiliate of $650,000, which is included in net income for

the year then ended as described in note x to the financial statements; nor were we

able to satisfy ourselves as the carrying value of the investment in the foreign

affiliate or equity in its earnings by other auditing procedures.

add explanatory paragraph before

opinion paragraph

- we were unable to audit

- note scope limitation

- nor were we able to satisfy ourselves by

other procedures

Opinion paragraph

in our opinion,

except for the effects of such adjustments, if any, as might have been

determined to be necessary had we been able to obtain evidence regarding the

foreign affiliate investment and earnings, ...

modify first section of opinion paragraph

- except for the effects of such adjustments,

if any

- had we been able to obtain evidence


Qualified (2)departure from GAAP


the company has excluded from property and debt in the accompanying balance

sheet, certain lease obligations that, in our opinion, should be capitalized in order to

conform with generally accepted accounting principles. If these lease obligations

were capitalized, property would be increased by $300,000, long term debt by

$250,000, and retained earnings by $50,000 as of December 31, 19x4. Additionally,

net income would be increased by $50,000 and earnings per share would be

decreased by $0.50 for the year then ended.


opinion paragraph

- note non-GAAP item

- provide amounts if reasonable possible

opinion paragraph

in our opinion,

except for the effects of not capitalizing certain lease obligations, as

discussed in the preceding paragraph, ...

modify first section of opinion paragraph

- except for the effects of not



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Disclaimer reports

Introductory paragraph

we were engaged to audit ...

modify first sentence of introductory

paragraph

- we were engaged

- delete last sentence on auditor's

responsibility

scope paragraph delete scope paragraph


we did not observe the taking of the physical inventory as of December 31, 19x4 or

19x3, since those dates were prior to our appointment as auditors for the company,

and we were unable to satisfy ourselves regarding inventory quantities by means of

other auditing procedures. the December 31, 19x4 and 19x3 inventory amounts

enter into the determination of net income and cash flows for the year ended

December 31, 19x4.

add explanatory paragraph before the

opinion paragraph

- we were unable to audit


- nor were we able to satisfy ourselves by

other procedures

Opinion paragraph

since the company did not take physical inventories and we were unable to apply

other auditing procedures to satisfy ourselves as to inventory quantities, the scope of

our work was not sufficient to enable us to express, and we do not express, an

opinion on these financial statements.

modify the opinion paragraph

- since we were unable to satisfy ourselves

regarding

- the scope was not sufficient

- we do not express an opinion

Adverse report

Adversedeparture from GAAP


as discussed in note x to the financial statements, the company carries its property,

plant, and equipment accounts at appraisal values, and provides depreciation on the

basis of such values. Generally accepted accounting principles require that property,

plant, and equipment be stated at an amount not in excess of cost, reduced by

depreciation based on such amount. because of this departure, as of December 31,

19x4 inventories have been increased by $450,000 by inclusion in manufacturing

overhead of depreciation in excess of that based on cost; property, plant, and

equipment, less accumulated depreciation is carried at $12,500,000 in excess of an

amount based on cost; resulting on an increase in retained earnings of $450,000 and

appraisal surplus of $12,500,000. for the year ended December 31, 19x4 cost of

goods sold has been increased by $350,000 because of the effects of the

depreciation accounting referred to above, resulting in an decrease in net income of

$117,000.


opinion paragraph


- provide amounts if reasonably possible

Opinion paragraph

In our opinion,

because of the effects of the matter discussed in the preceding

paragraph, the financial statements referred to above do not present fairly, in all

material respects, the financial position of ABC corporation as of December 31,

19x4, and the results of its operations and its cash flows for the year then ended in

conformity with generally accepted accounting principles.

modify front end of opinion paragraph

- because of the effects of the non-GAAP

item

- the financial statements do not present

fairly


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Opinion Type Introductory Scope Opinion Explanatory

Unqualified-standard 1 2 3 X

Unqualified with explanatory paragraph

or modified wording

(Shared report) Reports involving other auditors

1

(modified)

2

(modified)

3

(modified)

X

Substantial doubt about going concern 1 2 3 4

Lack of consistent application of generallyaccepted accounting principles

1 2 3 4

Change in previously issued opinion

1 2 4 3

Predecessor auditor's report not presented

1

(modified)

2 3

(modified)

X

Emphasis of a matter 1 2 3 4Auditor agrees with a departure from

promulgated accounting principles

(Rule203 -U.S only)

1 2 4

3

3

4

Qualified (1)-

Scope limitation

1 2

(modified)

4

(modified)

3

Qualified (2)-

Departure from GAAP

1 2 4

(modified)

3

Disclaimer

1

(modified)

X 3

(modified)

2

Adverse

1 2

4

(modified) 3


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1. The auditor's responsibility section of the standard unqualified audit report states that the audit is designed

to:

A) discover all errors and/or irregularities.

B) discover material errors and/or irregularities.

C) conform to generally accepted accounting principles.

D) obtain reasonable assurance whether the statements are free of material misstatement.

2. Which of the following statement is true?

A) The phrase "auditing standards generally accepted in the United States of America" can be found in the

opinion paragraph of a standard, unqualified audit report for a non-public company.

B) In the scope paragraph of the audit report issued for financial statements of a non-public company, the

auditor expresses an opinion about the internal controls of the company.

C) The phrase "generally accepted accounting principles" can be found in the opinion paragraph of a

standard unqualified report.

D) The introductory paragraph of the auditor's report states that the auditor is responsible for the preparation,

presentation and opinion on financial statements.

3. Examples of unqualified opinions which contain modified wording (without adding an explanatory

paragraph) include:

A) the use of other auditors.

B) material uncertainties.

C) substantial doubt about the audited company (or the entity) continuing as a going concern.

D) lack of consistent application of GAAP.

4. When a company's financial statements contain a departure from GAAP with which the auditor concurs,

the departure should be explained in:

A) the scope paragraph.

B) an explanatory paragraph that appears before the opinion paragraph.

C) the opinion paragraph.

D) an explanatory paragraph after the opinion paragraph.

5. A company has changed its method of inventory valuation from an unacceptable one to one in conformity

with generally accepted accounting principles. The auditor's report on the financial statements of the year of

the change should include:

A) no reference to consistency.

B) a reference to a prior period adjustment in the opinion paragraph.

C) an explanatory paragraph that justifies the change and explains the impact of the change on reported net

income.

D) an explanatory paragraph explaining the change.

6. Under AICPA auditing standards, the primary auditor issuing the opinion on the financial statements is

called the:

A) component auditor.


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B) principal auditor.

C) group engagement partner.

D) majority auditor.

7. Which of the following requires recognition in the auditor's opinion as to consistency?

A) The correction of an error in the prior year's financial statements resulting from a mathematical mistake

in capitalizing interest.B) A change in the estimate of provisions for warranty costs.

C) The change from the cost method to the equity method of accounting for investments in common stock.

D) A change in depreciation method which has no effect on current year's financial statements but is certain

to affect future years.

8. In which situation would the auditor be choosing between "except for" qualified opinion and an adverse

opinion?

A) The auditor lacks independence.

B) A client-imposed scope limitation

C) A circumstance imposed scope limitation

D) Lack of full disclosure within the footnotes

9. If the auditor lacks independence, a disclaimer of opinion must be issued:

A) if the client requests it.

B) only if it is highly material.

C) only if it is material but not pervasive.

D) in all cases.

10.client has changed their method of valuing inventory from FIFO to LIFO and the change has a material

effect on the financial statements. If the auditor does not concur with the appropriateness of the change, the

auditor should issue a(n):

A) disclaimer.

B) adverse opinion.

C) unqualified opinion.

D) qualified opinion.

Answer:DCA DD B

CCDDD


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Problem_1The auditorsreport that follows was drafted by a staff accountant of smith &Co.CPAs,at the completion of the audit

of the financial statements of Lenses Co.(a public company) for the year ended December 31,20X1.

RequiredIdentify deviations from the public company standard report.


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SOLUTON:

The auditors' report contains the following deficiencies:

The title should include the word Independent The address ordinarily should not be management (it should be the board of directors, or the

shareholders.)

Introductory paragraph It should begin with We have audited. rather than We have examined.. The final sentence concerning PCAOB requirements should not be included. Scope paragraph The audit should be conducted in accordance with Public Company Accounting Oversight Board

standards rather than generally accepted auditing standards. The auditor obtains reasonable assurance, not positive assurance. The assurance relates to the financial statements being free of material misstatements not all

misstatements.

Opinion paragraph The term present should be present fairly. Applied on a consistent basis at the end of the paragraph is inappropriate and should be deleted. Internal control paragraphWe also have reviewed at the beginning of the paragraph should be We have audited.

Exercise 1The following tentative auditorsreport was drafted by a staff accountant and submitted to a partner in the accounting

firm of Better & Best, CPAs:

AUDIT REPORT

To the Audit Committee of American Broadband, Inc.

We have examined the consolidated balance sheets of American Broadband, Inc. and subsidiaries as of December

31, 2011 and 2010, and the related consolidated statements of income, retained earnings, and cash flows for the years

then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to

express an opinion on these financial statements based on our audits.

Our audits were made in accordance with auditing standards generally accepted in the United States of America as

we considered necessary in the circumstances. Other auditors audited the financial statements of certain subsidiaries

and have furnished us with reports thereon containing no exceptions. Our opinion expressed herein, insofar as it

relates to the amounts included for those subsidiaries, is based solely upon the reports of the other auditors.

As fully discussed in Note 7 to the financial statements, in 2011, the company extended the use of the last-in,

first-out (LIFO) method of accounting to include all inventories. In examining inventories, we engaged Dr. IrwinSame (Nobel Prize winner 2009) to test check the technical requirements and specifications of certain items of

equipment manufactured by the company.

In our opinion, the financial statements referred to above present fairly the financial position of American

Broadband, Inc. as of December 31, 2011, and the results of operations for the years then ended, in conformity with

accounting principles generally accepted in the United States of America.

To be signed by Better & Best, CPAs March 1, 2012

Required

Identify deficiencies in the staff accountants tentative report that constitute departures from the generally accepted

standards of reporting.


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SOLUTON:

Deficiencies in the staff accountant's tentative report include the following:

1. Report title must include the word independent.

2. The report should generally be addressed to the board of directors or stockholders, not to the audit

committee.

3. The introductory paragraph should state, "we have audited," not "we have examined."

4. When the principal auditor decides to make reference to the audit of another auditor, the report

should indicate clearly in the introductory paragraph the division of responsibility regarding the

portions of the financial statements audited by each. Also, the opinion paragraph should state that the

opinion is based in part on the reports of other auditors. Neither of these was done.

5. When the principal auditor decides to make reference to the audit of the other auditor, the report

should disclose the dollar amounts or percentages of the portion of the financial statements audited by

the other auditor. This was not done.

6. The second paragraph is an inappropriately worded scope paragraph. It should be stated as follows:

We conducted our audits in accordance with auditing standards generally accepted in

the United States of America. Those standards require that we plan and perform the

audit to obtain reasonable assurance about whether the financial statements are

free of material misstatement. 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 statementpresentation. We believe that our audits and the report of other auditors provide a

reasonable basis for our opinion.

7. Although the introductory paragraph referred to an audit of the financial statements for the years

ended December 31, 2011 and 2010, an opinion was expressed only on the 2011 financial

statements.

8. The statement of cash flows was not identified in the opinion paragraph, and financial statements

were not referred to in the opinion paragraph as "consolidated."9. The explanatory sentence for consistency should follow the opinion paragraph, not precede it. Also,

the second sentence in the third paragraph should be omitted.

10. There is no inclusion of the phrase, "in all material respects" in the opinion paragraph.


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Problem 2(102 )

Situation Appropriate opinion Your reasons

1.

Disclaimer

2.

Unqualified

3.

4.

Qualified

GAAP

5.

Qualified

GAAP


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Problem_3Several types of opinions are described in a. through h. below. For each opinion, select the appropriate

description of that opinion from the list numbered 1 through 8 below that corresponds with the type of opinion.

Types of Opinion

a.______ Unqualified opinion with an explanatory paragraph for change in consistencyb.______ Disclaimer of opinion due to scope limitationc.______ Qualified opinion due to inadequate disclosure; report includes a going concern explanatory

paragraph.

d.______ Shared report with other auditorse.______ Standard unqualified (clean) opinionf. ______ Qualified opinion clue to a scope limitationg.______ Adverse opinion for departure from accounting standardsh.______ Disclaimer of opinion due to lack of independenceDescription of Opinions (each item in li st can be used only once)

1.One paragraph report containing the words we do not empress an opinion"2.Three paragraph report with no changes in wording3.Three paragraph report; the wording in all three paragraphs has been modified4.Three paragraph report in which the opinion includes we do not express an opinion5.Four paragraph report in which the explanatory fourth paragraph precedes the opinion; opinion includes

except for the effects ofsuch adjustments, if any, as might have been determined had we been able to

examine

6.Four paragraph report in which the explanatory fourth paragraph precedes the opinion includes financialstatements do not present fairly

7.Four paragraph report in which the explanatory fourth paragraph follows the opinion8. Five paragraph report with explanatory paragraphs preceding and following the opinion.

Type of

Opiniona b c d e f g h

Description

of Opinion 7 4 8 3 2 5 6 1


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Problem4Audit situations 1 through 8 present various independent factual situations an auditor might encounter in

conducting an audit. List A represents the types of opinions the auditor ordinarily would issue, and List B

represents the report modifications (if any) that would be necessary. For each situation, select one response

from List A and one from List B. Select, as the best answer for each item, the action the auditor normally

would take. Items from either list may be selected once, more than once, or not at all.

Assume the following:

The auditor is independent

The auditor previously expressed an unqualified opinion on the prior-year financial statements unless

otherwise noted

Only single-year (not comparative) statements are presented for the current year (unless otherwise

stated)

The conditions for an unqualified opinion exist unless contradicted in the factual scenario

The conditions stated in the factual scenario are material

No report modifications are to be made except in response to the factual scenario

Factual Scenario

______1. In auditing the Long-Term Investments account, an auditor is unable to obtain audited F/S for an

investee located in a foreign country. The auditor concludes that sufficient competent evidential matter

regarding this investment cannot be obtained but it is not pervasive to the financials as a whole.

______2. Due to recurring operating losses and working capital deficiencies the auditor has substantial

doubt about an entity's ability to continue as a going concern for a reasonable period of time. However, the

F/S disclosures are adequate.

______3. The principal auditor decides to refer to the work of another auditor, who audited a wholly owned

subsidiary of the entity and issued an unqualified opinion.

______4. An entity issues F/S that present financial position and results of operations but omits the related

statement of cash flows. Management discloses in the notes to the F/S that it does not believe the statement

of cash flows to be useful.

______5. An entity changes its depreciation method for production equipment from Straight line to units of

production based on hours of utilization. The auditor concurs with the change, although it has a material

effect on the comparability of the entity's F/S.

______6. An entity is a defendant in a lawsuit alleging infringement of certain patent rights. However,

management cannot reasonably estimate the ultimate outcome of the litigation. The auditor believes that

there is a reasonable possibility of a significant material loss, but the lawsuit is adequately disclosed in the

notes to the F/S.

______7. An entity discloses certain lease obligations in the notes to the F/S. The auditor believes that the

failure to capitalize these leases is a departure from GAAP.

______8. The entity wishes to show comparative F/S and include the prior year. However, the prior year F/S

contained a qualification due to an inappropriate method of GAAP. Accordingly, management corrected theprior year GAAP deficiency and included the updated numbers in the comparative financials for the current

year.


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List A

Opinion Choices

List B

Report Modification Choices

A. Qualified

H. Describe the circumstances in an explanatory paragraph

recedingthe opinion paragraph w/o modifying the three standard

paragraphs.

B. Unqualified

I. Describe the circumstances in the opinion paragraph w/o adding

an explanatory paragraph.

C. Adverse

J. Describe the circumstances in an explanatory paragraph

receding the opinion paragraph and modify the opinion

paragraph.

D. Disclaimer

K. Describe the circumstances in an explanatory paragraph

ollowingthe opinion paragraph and modify the opinion

paragraph.

E. Either Qualified or Adverse

L. Describe the circumstances in an explanatory paragraph

receding the opinion paragraph and modify the scope & opinionparagraph.

F. Either Disclaimer or Adverse

M. Describe the circumstances in an explanatory paragraph

ollowing the opinion paragraph and modify the scope & opinion

paragraph.

G. Either Qualified or Disclaimer

N. Describe the circumstances in the scope paragraph w/o adding

an explanatory paragraph.

O. Describe the circumstances in an explanatory paragraph

ollowingthe opinion paragraph w/o modifying the three standardparagraphs.

P. Describe the circumstances in the introductory paragraph w/o

adding an explanatory paragraph.

.

Q. Describe the circumstances in the introductory paragraph w/o

adding an explanatory paragraph, and modify the scope & opinion

paragraphs.

R. Issue the standard auditor's report w/o modification.

S. None of the above.

Answer:

1. A, L 2. B,O 3. B, Q 4. A, J 5. B, O 6. B, O 7. E, J 8. B, H

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