Casa Royale, Inc., a nonpublic company, retained Ying and Company CPA to perform an audit of the financial statements for the current year. Howard Smythe, the partner in charge of the audit, drafted the following unmodified report:
Independent Auditor's Report
To the Management of Casa Royale, Inc.:
We have examined the accompanying consolidated balance sheet of Casa Royale, Inc., and its subsidiaries, as of December 31, 20X1, and the related consolidated statements of income, retained earnings, and cash flows for the years then ended.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 consolidated financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or illegal acts. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is adequate to provide a basis for our audit opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Casa Royale, Inc., and its subsidiaries as of December 31, 20X1, and the results of their operations and their cash flows for the years then ended in accordance with auditing standards generally accepted in the United States of America.
Howard Smythe, Partner
February 12, 20X2
Respond as to the accuracy of the following comments made by a reviewer of the report:
Reviewer’s Comments Correct (yes or no)
a. The report should not be addressed to management.
b. The report should indicate that we have “audited,” rather than “examined,” the financial statements (first paragraph after introduction).
c. The report should not indicate anything concerning management’s responsibility for internal control.
d. The report should state that the auditors’ responsibility is to express “reasonable assurance,” not an opinion (first paragraph under “auditor’s” responsibility).
e. The audit is designed to assess risks of material misstatements due to errors or fraud; the term “illegal acts” is incorrect (second paragraph under auditor’s responsibility).
f. The report should not refer to the auditors “evaluating the appropriateness of accounting policies,” since those are the responsibility of management.
g. The evidence should be sufficient and appropriate rather than “adequate” (third paragraph under auditor’s responsibility).
h. The opinion should not include “in all material respects” since the auditors are providing an opinion on the accuracy of the financial statements (opinion paragraph).
i. The opinion should be on “accounting principles generally accepted in the United States of America,” not on auditing standards (opinion paragraph).
j. The signature on the report should be that of the CPA firm, not that of the partner.