Question

1. For each of the following situations, assume that you are reporting on a client’s financial statements. The company is a private company (not publicly held). Unless otherwise stated, assume that the matter involved is material and that the client has refused to make any required adjustments.

Types of reports:

1. Unmodified (Unqualified)
2. Modified (Qualified)
3. Disclaimer
4. Adverse

Types of paragraphs:

A. No additional paragraph   

B. “Emphasis of matter” paragraph required

C. “Basis for” paragraph required

D. “Emphasis of matter” paragraph allowed but not required

E. “Other matter” paragraph allowed but not required

	Report type?（Select from 1.2.3.4）	Additional Paragraph?(Select from A,B,C,D,E )
Your client did not follow GAAP in recording equipment leases.
Your client has a major lawsuit pending against them. The lawsuit is disclosed in the notes to the financials.
Your client uses the specific identification method of accounting for valuable items in inventory, and LIFO for less valuable items. This is an accepted practice for companies in the client industry.
Your client installed a new computer system during the year. The system suffered a complete breakdown shortly after year end. The client was not able to successfully reconstruct all the accounting records. As a result, you were unable to verify either the accounts receivable or accounts payable balances in time to meet the reporting deadline.

2.

For each of the following situations, assume that you are reporting on a client’s financial statements. The company is a private company (not publicly held). Unless otherwise stated, assume that the matter involved is material and that the client has refused to make any required adjustments.

Types of reports:

1. Unmodified (Unqualified)
2. Modified (Qualified)
3. Disclaimer
4. Adverse

Types of paragraphs:

A. No additional paragraph   

B. “Emphasis of matter” paragraph required

C. “Basis for” paragraph required

D. “Emphasis of matter” paragraph allowed but not required

E. “Other matter” paragraph allowed but not required

	Report type?	Additional paragraph?
You relied on the work of other auditors to observe physical inventories in cities where you had no offices.
Due to recurring operating losses and working capital deficiencies, you have substantial doubt about your client’s ability to continue as a going concern for a reasonable period of time. The notes to the financial statements adequately disclose the situation.
You were hired after year-end and so you were unable to observe the counting of the year-end inventory. However, you were able to apply other procedures and you determined that ending inventory and related information are properly stated.
A client did not follow GAAP in applying foreign currency translation rules in consolidation of foreign subsidiary.

Answer 1

1.

	Report type?（Select from 1.2.3.4）	Additional Paragraph?(Select from A,B,C,D,E )
Your client did not follow GAAP in recording equipment leases.	2. Qualified	C. Basis for paragraph
Your client has a major lawsuit pending against them. The lawsuit is disclosed in the notes to the financials.	1. Unmodified	A. Emphasis of Matter
Your client uses the specific identification method of accounting for valuable items in inventory, and LIFO for less valuable items. This is an accepted practice for companies in the client industry.	1. Unmodified	E. Other Matter
Your client installed a new computer system during the year. The system suffered a complete breakdown shortly after year end. The client was not able to successfully reconstruct all the accounting records. As a result, you were unable to verify either the accounts receivable or accounts payable balances in time to meet the reporting deadline.	3. Disclaimer	C. Basis for paragraph

2.

E. “Other matter” paragraph allowed but not required

	Report type?	Additional paragraph?
You relied on the work of other auditors to observe physical inventories in cities where you had no offices.	1. unmodified	E. Other matter
Due to recurring operating losses and working capital deficiencies, you have substantial doubt about your client’s ability to continue as a going concern for a reasonable period of time. The notes to the financial statements adequately disclose the situation.	1. Unmodified	D. Emphasis of matter
You were hired after year-end and so you were unable to observe the counting of the year-end inventory. However, you were able to apply other procedures and you determined that ending inventory and related information are properly stated.	1.Unmodified	A. No additional paragraph
A client did not follow GAAP in applying foreign currency translation rules in consolidation of foreign subsidiary.	2.Modified	C. Basis for Paragraph