Assume that items 1 through 8 are situations that Jones, CPA, has encountered during his audit...
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Assume that items 1 through 8 are situations that Jones, CPA, has encountered during his audit of Welles Incorporated, a nonpublic company. List A represents the types of opinions the auditor ordinarily would issue and List B represents a portion of the needed report modifications-whether an additional paragraph will be included. For each situation, select one response from List A and one from List B. Select as the best answers for each item the action the auditor would normally take. The types of opinions in List A and the report modifications in List B may be selected once, more than once, or not at all. Assume . The auditor is independent. • The auditor previously expressed an unmodified opinion on the prior year's financial statements. • Only single-year (not comparative) statements are presented for the current year. . The conditions for an unmodified opinion exist unless contradicted by the facts. The conditions stated in the items to be answered are material, unless otherwise indicated. • Each item to be answered is independent of the others. No report modifications are to be made except in response to the factual situation. • The auditor will not treat a situation as an "emphasis of a matter" in what remains an unmodified audit report unless it is one of those circumstances specifically illustrated in the Professional Standards as an example of a matter an auditor may wish to emphasize. A B. 6 C. D E F. G. List A Types of opinions Either an "except for" qualified opinion or an adverse opinion Either a disclaimer of opinion or an "except for" qualified opinion Either an adverse opinion or a disclaimer of opinion An "except for qualified opinion An unmodified opinion An adverse opinion A disclaimer of opinion List B Report modifications H. Basis for modification paragraph. I. Emphasis-of-mutter paragraph. J. Other-matter paragraph K. No additional paragraph. L.. Describe the circumstances within the opinion paragraph 1. Jones hired an actuary to assist in corroborating Welles' complex pension calcula- tions concerning accrued pension liabilities that account for 35% of the client's total liabilities. The actuary's findings are reasonably close to Welles' calculations and support the financial statements. 2. Welles holds a note receivable consisting of principal and accrued interest payable in 20X4. The note's maker recently filed a voluntary bankruptcy petition, but Welles failed to reduce the recorded value of the note to its net realizable value, which is approximately 20% of the recorded amount. 3. Jones was engaged to audit a client's financial statements after the annual physical inventory count. The accounting records were not sufficiently reliable to enable him to become satisfied as to the year-end inventory balances. 4. Jones found an immaterial adjustment relating to inventory. Welles has refused to adjust the financial statements to reflect this immaterial item. 5. Welles financial statements do not disclose certain long-term lease obligations. Jones determined that the omitted disclosures are required by FASB. 6. Jones decided not to take responsibility for the work of another CPA who audited a wholly owned subsidiary of Welles. The total assets and revenues of the subsidi- ary represent 27% and 28%, respectively, of the related consolidated totals. 7. Welles changed its method of accounting for the cost of inventories from FIFO to LIFO. Jones concurs with the change although it has a material effect on the com- parability of the financial statements. Due to losses and adverse key financial ratios, Jones has substantial doubt about Welles' ability to continue as a going concern for a reasonable period of time. The client has adequately disclosed its financial difficulties in a note to its financial statements. Also, Jones has ruled out the use of a disclaimer of opinion. Types of opinions (A-G) Additional Paragraph (H-L) Assume that items 1 through 8 are situations that Jones, CPA, has encountered during his audit of Welles Incorporated, a nonpublic company. List A represents the types of opinions the auditor ordinarily would issue and List B represents a portion of the needed report modifications-whether an additional paragraph will be included. For each situation, select one response from List A and one from List B. Select as the best answers for each item the action the auditor would normally take. The types of opinions in List A and the report modifications in List B may be selected once, more than once, or not at all. Assume . The auditor is independent. • The auditor previously expressed an unmodified opinion on the prior year's financial statements. • Only single-year (not comparative) statements are presented for the current year. . The conditions for an unmodified opinion exist unless contradicted by the facts. The conditions stated in the items to be answered are material, unless otherwise indicated. • Each item to be answered is independent of the others. No report modifications are to be made except in response to the factual situation. • The auditor will not treat a situation as an "emphasis of a matter" in what remains an unmodified audit report unless it is one of those circumstances specifically illustrated in the Professional Standards as an example of a matter an auditor may wish to emphasize. A B. 6 C. D E F. G. List A Types of opinions Either an "except for" qualified opinion or an adverse opinion Either a disclaimer of opinion or an "except for" qualified opinion Either an adverse opinion or a disclaimer of opinion An "except for qualified opinion An unmodified opinion An adverse opinion A disclaimer of opinion List B Report modifications H. Basis for modification paragraph. I. Emphasis-of-mutter paragraph. J. Other-matter paragraph K. No additional paragraph. L.. Describe the circumstances within the opinion paragraph 1. Jones hired an actuary to assist in corroborating Welles' complex pension calcula- tions concerning accrued pension liabilities that account for 35% of the client's total liabilities. The actuary's findings are reasonably close to Welles' calculations and support the financial statements. 2. Welles holds a note receivable consisting of principal and accrued interest payable in 20X4. The note's maker recently filed a voluntary bankruptcy petition, but Welles failed to reduce the recorded value of the note to its net realizable value, which is approximately 20% of the recorded amount. 3. Jones was engaged to audit a client's financial statements after the annual physical inventory count. The accounting records were not sufficiently reliable to enable him to become satisfied as to the year-end inventory balances. 4. Jones found an immaterial adjustment relating to inventory. Welles has refused to adjust the financial statements to reflect this immaterial item. 5. Welles financial statements do not disclose certain long-term lease obligations. Jones determined that the omitted disclosures are required by FASB. 6. Jones decided not to take responsibility for the work of another CPA who audited a wholly owned subsidiary of Welles. The total assets and revenues of the subsidi- ary represent 27% and 28%, respectively, of the related consolidated totals. 7. Welles changed its method of accounting for the cost of inventories from FIFO to LIFO. Jones concurs with the change although it has a material effect on the com- parability of the financial statements. Due to losses and adverse key financial ratios, Jones has substantial doubt about Welles' ability to continue as a going concern for a reasonable period of time. The client has adequately disclosed its financial difficulties in a note to its financial statements. Also, Jones has ruled out the use of a disclaimer of opinion. Types of opinions (A-G) Additional Paragraph (H-L)
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Auditing and Assurance services an integrated approach
ISBN: 978-0132575959
14th Edition
Authors: Alvin a. arens, Randal j. elder, Mark s. Beasley
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