For each of the following brief scenarios, assume that you are reporting on a client’s financial statements. Reply as to the type(s) of opinion possible for the scenario. In addition:
• Unless stated otherwise, assume the matter involved is material.
• If the problem does not state that a misstatement (or possible misstatement) is pervasive, assume that it may or may not be pervasive (thus, the appropriate reply may include two possible reports).
• Do not read more into the circumstance than what is presented.
Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditors wish to emphasize a particular matter.
Report Types may be used once, more than once, or not at all.

a. Bowles Company is engaged in a hazardous trade and has obtained insurance coverage related to the hazard. Although the likelihood is remote, a material portion of the company’s assets could be destroyed by a serious accident.
b. Draves Company owns substantial properties that have appreciated significantly in value since the date of purchase. The properties were appraised and are reported in the balance sheet at the appraised values (which materially exceed costs) with related disclosures. The CPAs believe that the appraised values reported in the balance sheet reasonably estimate the assets’ current values.
c. During the audit of Eagle Company, the CPA firm has encountered a significant scope limitation relating to inventory record availability and is unable to obtain sufficient appropriate audit evidence in that area.
d. London Company has material investments in stocks of subsidiary companies. Stocks of the subsidiary companies are not actively traded in the market, and the CPA firm’s engagement does not extend to any subsidiary company. The CPA firm is able to determine that all investments are carried at original cost, but has no real idea of market value. Although the difference between cost and market could be material, it could not have a pervasive effect on the overall financial statements.
e. Slade Company has material investments in stocks of subsidiary companies. Stocks of the subsidiary companies are actively traded in the market. Management insists that all investments be carried at original costs, and the CPA firm is satisfied that the original costs are accurate. The CPA firm believes that the client will never ultimately realize a substantial portion of the investments because the market value is much lower than the cost; the client has fully disclosed the facts in notes to the financial statements.
Report Types
1. Unmodified—standard report
2. Unmodified with an emphasis- of-matter paragraph
3. Qualified
4. Adverse
5. Disclaimer
6. Either qualified or adverse
7. Either qualified or disclaimer
8. Either adverse or disclaimer

  • CreatedOctober 27, 2014
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