Question: Last year Johnson Barkley CPAs audited the consolidated financial

Last year, Johnson & Barkley, CPAs, audited the consolidated financial statements of Jordan Company (a nonpublic company) for the year ended December 31, 20X0, and expressed a standard unmodified report.
Johnson & Barkley also audited Jordan’s this year’s financial statements—for the year ended December 31, 20X1. These consolidated financial statements are being presented on a comparative basis with those of the prior year, and an unmodified opinion is being expressed.
Smith, the engagement supervisor, instructed Abler, an assistant on the engagement, to draft the auditors’ report. In drafting the report below, Abler considered the following:
• Jordan changed its method of accounting for inventory from LIFO to FIFO in 20X1.
• Larkin & Lake, CPAs, audited the financial statements of BX, Inc., a consolidated subsidiary of Jordan, for the year ended December 31, 20X1. The subsidiary’s financial statements reflected total assets and revenues of 2 percent and 3 percent, respectively, of the consolidated totals. Larkin & Lake expressed an unmodified opinion and furnished John-son & Barkley with a copy of the auditors’ report. Johnson & Barkley has decided to assume responsibility for the work of Larkin & Lake insofar as it relates to the expression of an opinion on the consolidated financial statements taken as a whole and has applied the necessary audit procedures.
• Jordan is a defendant in a lawsuit alleging patent infringement. This is adequately dis-closed in the notes to Jordan’s financial statements, but no provision for liability has been recorded because the ultimate outcome of the litigation cannot presently be determined.
Abler drafted the following audit report:

Auditors’ Report
We have audited the accompanying consolidated financial statements of Jordan Company and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 20X1 and 20X0, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements.

Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits 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 auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider 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. Accordingly, we express no such opinion. 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 sufficient and appropriate to provide a basis for our audit opinion.
As discussed in Note 2 to the consolidated financial statements, the Company adopted the first- in-first-out method of inventory valuation in 20X1. Our opinion is not modified with respect to this matter.
In our opinion, the consolidated financial statements referred to here present fairly, in all material respects, the financial position of Jordan Company and its subsidiaries as of December 31, 20X1 and 20X0, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Johnson & Barkley, CPAs
Phoenix, Arizona
December 31, 20X1

Smith reviewed Abler’s draft and stated in the Supervisor’s Review Notes below that there were deficiencies in Abler’s draft. Items 1 through 10 represent the deficiencies noted by Smith. For each deficiency, indicate whether Smith is correct or incorrect in the criticism of Abler’s draft.
1. The report’s title is incorrect as it should include the word “independent.”
2. The report should have an addressee such as the board of directors.
3. There should be a section entitled Management’s Responsibility for the Financial Statements.
4. The first sentence of the Auditors’ Responsibility section should state that “Our responsibility is to provide assurance . . .,” not “Our responsibility is to express an opinion . . .”
5. The Auditors’ Responsibility and the Opinion sections should both refer to the component auditors.
6. The third paragraph under the Auditors’ Responsibility section is not required—let’s omit it.
7. The emphasis-of-matter paragraph should follow the opinion paragraph.
8. The Opinion section should indicate that the principles were consistently applied except for the change in method of inventory valuation.
9. The report should be dated as of the date sufficient appropriate audit evidence has been gathered, not as of year-end.
10. The names of the individual financial statements should be included in the Opinion section.

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  • CreatedOctober 27, 2014
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