Question

12 UM LapurdULY 13) Unmodified opinion-nonstandard report limitation wording (6) Disclaimer (4) Qualified opinion only GAAP departure (7) Adverse" 2.27 (OBJECTIVES 3-4, 3-5, 3-6, 3-7, 3-6) The following are independent situations for which ou will recommend an appropriate audit report: 1. Subsequent to the date of the financial statements as part of his post-balance sheet date audit procedures, a CPA learned that a recent fire caused heavy damage to one of a client's two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail. The financial statements and footnotes as prepared by the client did not disclose the loss caused by the fire. 2. During the course of his audit of the financial statements of a corporation for the purpose of expressing an opinion on the statements, a CPA is refused permission to inspect the minutes of board of director meetings that document significant deci sions of the board. The corporation secretary instead offers to give the CPA a certi- fied copy of all resolutions and actions involving accounting matters. 3. A CPA is engaged in the audit of the financial statements of a large manufacturing company with branch offices in many widely separated cities. The CPA was not able to count the substantial undeposited cash receipts at the close of business on the last day of the fiscal year at all branch offices. As an alternative to this auditing procedure used to verify the accurate cutoff of cash receipts, the CPA observed that deposits in transit as shown on the year-end bank reconciliation appeared as credits on the bank statement on the first business day of the new year. He was satisfied as to the cutoff of cash receipts by the use of the alternative procedure. 4. On January 2, 2017, the Retail Auto Parts Company received a notice from its primary supplier that effective immediately, all wholesale prices will be increased 10%. On the basis of the notice, Retail Auto Parts revalued its December 31, 2016, inventory to reflect the higher costs. The inventory constituted a material proportion of total assets; how- ever, the effect of the revaluation was material to current assets but not to total assets or net income. The increase in valuation is adequately disclosed in the footnotes. 5. A CPA has completed her audit of the financial statements of a bus company for the year ended December 31, 2016. Prior to 2016, the company depreciated its buses over a 10-year period. During 2016, the company determined that a more realistic esti- mated life for its buses was 12 years and computed the 2016 depreciation on the basis of the revised estimate. The CPA has satisfied herself that the 12-year life is reasonable. The company has adequately disclosed the change in estimated useful lives of its buses and the effect of the change on 2016 income in a note to the financial statements. 6. E-Lotions.com, Inc., is an online retailer of body lotions and other bath and body supplies. The company records revenues at the time customer orders are placed on the Web site, rather than when the goods are shipped, which is usually 2 days after the order is placed. The auditor determined that the amount of orders placed but not shipped as of the balance sheet date is not material. . For the past 5 years, a CPA has audited the financial statements of a manufactur- ing company. During this period, the audit scope was limited by the client as to the observation of the annual physical inventory. Because the CPA considered the inven- tories to be material and he was not able to satisfy himself by other auditing proce- dures, he was unable to express an unmodified opinion on the financial statements in each of the 5 years. on AICPA question paper, American Institute of Certified Public Accountants. Chapter 3 / AUDIT REPC

Answer 1

a. Auditor should form an opinion on the financial statements based on an evaluation of the conclusions drawn from the audit evidence obtained, and express clearly that opinion through a written report that also describes the basis of opinion. The auditor shall express an unmodified opinion when the auditor concludes that the financial statements are prepared in all material respects in accordance with the applicable financial reporting framework. The objective of the auditor is to express clearly an appropriately modified opinion on the financial statements that is necessary when the auditor concludes, based on the audit evidence obtained that the financial statements as a whole are not free from material misstatement or auditor is unable to obtain sufficient appropriate audit evidence. The conditions deviated from a standard unmodified opinion are as follows: fan audit of a financial statement of a corporation for the purpose of expressing an opinion on the statements ,a CPA is refused permission to inspect minutes of board of director meeting that document significant decisions of the board. 2. The CPA was not able to count the substantial undeposited cash receipts at the close of the business on the last day of fiscal year 3. For the past 5 years a CPA has audited the financial statements of a manufacturing company during this period the audit scope was limited by the client as to the observation of the annual physical inventory. b. In planning an audit ,the auditor makes judgements about the size of the misstatements that will be considered material. These judgements provide basis for 1. Determining the nature, timing and extent of risk assessment procedures 2. Identifying and assessing the risks of material misstatements 3. Determining the nature, timing and extent of further audit procedures Performance materiality refers to the amount s set by the auditor at less than the materiality level or levels for particular classes of transactions ,account balances or disclosures. The audit documentation shall include the following amounts and factors 1. Materiality for the financial statements as a whole 2. If applicable, the materiality level or levels for articular classes of transactions account balances or disclosures 3. Performance materiality 4. Any revision of the above as audit progressed. c. The auditor shall express a qualified opinion when the auditor, having obtained sufficient appropriate audit evidence,concludes that misstatements individually or in the aggregate, are material, but not pervasive, to the financial statements or the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any,could be material but not pervasive. The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence,concludes that misstatements individually or in aggregate ,are both material and pervasive to the financial statement. The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements if any, could be material and pervasive. In the above case the auditor is requires to issue qualified opinion or disclaimer opinion