Debate

71. William & Plaud are principle auditors for the Lowell Corporation. One of the subsidiaries of Lowell Corporation, Wilson Manufacturing Co., is audited by Lyle & Adams. a. If William & Plaud make reference in their report to reliance on the report of other auditors are they qualifying their opinion? Explain. a. No. The auditors are indicating a division of responsibility between them and the other auditors. b. The auditors should: Make inquiries concerning the other auditors' professional reputation. Obtain a letter from the other auditors stating that they are aware of the use of their report and that they are independent with respect to the client.

73. Identify the deficiencies (including both incorrect statements and omissions) contained in the auditors' report on a nonpublic company as drafted below. You will receive credit for those you properly identify, and lose credit for those you identify which aren't actually deficiencies. Auditors' Report To the Board of Directors and Management XYZ Company We have reviewed the consolidated balance sheet of XYZ Company as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows for the year then ended. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted accounting standards. Those standards require that we plan and perform the audit to obtain absolute 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 statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present the financial position of XYZ Company as of December 31, 20XX, and the results of operations and its cash flows for the year then ended in conformity with auditing standards generally accepted in the United States of America applied on a consistent basis with the preceding year. Art Youngster & Co. Certified Public Accountants Phoenix, Arizona December 31, 20XX

The report contains the following deficiencies: 1. Introductory paragraph In sentence 1, the word "reviewed" should be "audited." The sentence on the responsibility of management is omitted. 2. Scope Paragraph Sentence 1 should state that the audit was performed in accordance with auditing standards generally accepted in the United States of America. Sentence 2 should state that an audit provides "reasonable," not "absolute" assurance. 3. Opinion Paragraph "Auditing standards" should be "accounting principles." No mention of consistency should be made. 4. Other The word "independent" should be included in the report's title. The report should be dated as of the last day of field work, not the last day of the year being audited.

74. Use the accompanying solution sheet to reply to all of the situations below that relate to the audit of financial statements of nonpublic companies. Unless indicated otherwise, assume that material amounts are involved. A company has departed from GAAP for what the auditor considers to be unjustified reasons. A company's inventory records were deficient and the auditor was required to satisfy herself that the inventory was properly stated using alternative procedures. She is satisfied with the results of those procedures. In auditing a client, an auditor has determined that substantial doubt exists about an entity's ability to continue as a going concern. A principal auditor decides not to take responsibility for the work of another CPA who audited a 70% owned subsidiary and issued an unqualified opinion. The total assets and revenues of the subsidiary are 5% and 8%, respectively, of the total assets and revenues of the entity being audited. A company changes from FIFO to LIFO for inventory valuation and the auditor concurs with the change. The change has a material effect on the comparability of the entity's financial statements this year, but is expected to have an immaterial effect in the future. A client is issuing two years of comparative financial statements. The first year was audited by another auditor who, after performing the appropriate procedures, has updated and reissued her audit report. (NOTE: You are replying as to the proper report to be issued at the end of the second year.)[3]

A company has included incorrect other information in a client prepared document containing audited statements. The financial statements are correct, but the president's letter is incorrect. A client has changed its estimate of likely doubtful accounts from 2% of credit sales to 3%. The auditor believes the change to be reasonable.[2] Reply as to the following three factors relating to the appropriate audit report(s) for each of the situations. More than one type of opinion and placement of explanatory paragraph reply may be appropriate. Circumstances--Other auditors, going concern, consistency, emphasis of a matter, justified departure from GAAP, unjustified departure from GAAP, Scope Limitation (1 of these must be selected except for numbers 6 and 7).

Types of Opinion A. Standard unqualified B. Unqualified with an explanatory paragraph C. Unqualified with explanatory language, but no explanatory paragraph. D. Qualified E. Disclaimer F. Adverse If more than one type of opinion is appropriate list each. Placement of explanatory paragraph--before opinion paragraph, after opinion paragraph, either before or after the opinion paragraph, not applicable since there is no explanatory paragraph. (If more than one type of opinion was appropriate, provide a separate reply for placement of explanatory paragraph for each.)

17-5

(1) Unqualified opinionstandard report. This report represents a "clean bill of health" and may be issued when there are no material departures from generally accepted accounting principles, no significant scope limitations preventing the gathering of necessary evidence, and when no conditions requiring explanatory language exist.

(2)

Unqualified opinionwith explanatory language added to report. This is an audit report with an unqualified opinion, but with circumstances that result in the auditors adding certain explanatory language to the report. Examples of such circumstances are those in which other auditors have performed a portion of the audit, or when a question concerning an entitys ability to continue as a going concern exist.

(3)

Qualified opinion. A qualified opinion is issued when the auditors' examination is restricted as to its scope or the financial statements depart from generally accepted accounting principles. A qualified opinion is still a positive opinion; it asserts that the presentation in the financial statements, viewed as a whole, is fair.

(4)

Adverse opinion. This is a negative opinion, asserting that the financial statements are not a fair presentation. It is issued when the auditors' exceptions to the presentation in the financial statements are so significant that a qualified opinion would be an inadequate warning to users of those statements.

(5)

Disclaimer of opinion. A disclaimer of opinion means that the auditors were unable to form an opinion. It is issued whenever there are such significant scope limitations that the auditors were unable to obtain sufficient evidence to form an opinion of the statements viewed as a whole, or a significant scope limitation imposed by the client.

17-12 If the client's failure to comply with generally accepted accounting principles is immaterial, the auditors may still issue an unqualified opinion. If the problem is material, they must qualify their report as to the accounting principles in question, using the "except for" qualifying language. If the problem is sufficiently material to overshadow the fairness of the financial statements ("very material"), the auditors must issue an adverse opinion. 17-18 Yes. Each financial statement "stands alone." Thus, the CPAs may issue different types of opinions on the financial statements of successive years when reporting on comparative statements. The CPAs may even issue different opinions on the different financial statements for a single year. 17-21 (a) Generally, the independent auditors must issue a disclaimer of opinion when client imposed restrictions limit significantly the scope of the audit, because such restrictions lead to questions concerning whether the client is withholding important information. (b) Generally, the principal auditors issue an unqualified opinion when they decide to make reference to the report of another CPA firm as a basis, in part, for their opinion. Such a reference indicates a sharing of responsibility for the scope of the audit; it does not represent a qualification of the auditors' report.

(c)

A lack of disclosure leads to either a qualified opinion or an adverse opinion. Since it is a note disclosurewith no income effectthat is being omitted, one would generally expect issuance of a qualified opinion.

17-22

(a) (1) The first sentence of the statement is partially true. It is important to read the notes to financial statements because they provide important supplementary information. (2) Notes often pertain to complex matters and are presented in technical language. Certainly it must be acknowledged that sometimes they could be presented in a clearer form. To the extent the notes supplement disclosures in the body of the financial statements, they could reduce the auditors' exposure to third-party liability. The disclosure must be supplementary, not contradictory.

(3)

(b)

(1) The second statement is wrong in asserting that the notes can be used to correct or contradict financial statement presentation. Notes are an integral part of the financial statements. If there is contradiction or if the presentation is incomprehensible, this constitutes inadequate reporting and requires qualification of the audit report. (2) The statement fails to recognize that the need for accuracy and completeness sometimes overrides the desire for clarity. The statement incorrectly assigns management's primary responsibility for the financial statements and notes to the auditors. The auditors' relationship to the notes is the same as their relationship to the balance sheet and other financial statements; their actions are governed by the same reporting responsibilities and liabilities to interested parties. Because notes are prepared by management, the auditors cannot control their content. Other advisers, e.g., legal counsel, will influence the wording of notes. The auditors properly should recommend improvements in presentation, but they will make an opinion exception only if disclosure is inadequate or so unclear as to be misleading.

(3)

(4)

74. Changes in a client's accounting choices either affect "consistency" in the application of GAAP or they do not. For each item listed below, state whether the item affects consistency and identify the effect the change will have on the audit report. 1) Change in accounting estimate 2) Correction of an error in principle 3) Change in reporting entity 4) Correction of an error that does not involve an accounting principle 5) Change in accounting principle 6) Change in classification and reclassification 7) Change expected to have a material future effect 1) This change does not affect consistency and no modification to the audit report is required 2) This change affects consistency and an explanatory paragraph after the opinion paragraph is required on the audit report 3) This change affects consistency and an explanatory paragraph after the opinion paragraph is required on the audit report 4) This change does not affect consistency and no modification to the audit report is required 5) This change affects consistency and an explanatory paragraph after the opinion paragraph is required on the audit report 6) This change does not affect consistency and no modification to the audit report is required 7) This change does not affect consistency and no modification to the audit report is required 75. For each of the following situations, indicate what type of audit report is most appropriate. a. The auditor lacks independence in fact, but not necessarily in appearance b. There is a scope limitation and it is material but the overall financial statements are still presented fairly. c. The uncorrected misstatements are immaterial d. There is a departure from GAAP and it is pervasively material a. Disclaimer; b. Qualified; c. Unqualified; d. Adverse