For the following independent situations, assume that you are the audit partner on the engagement:

1.	McClellan's Used Cars, a client of yours, recently changed its depreciation method from straight-line to sum-of-the-years'-digits. The effect of the change on the current year's income is not material but in future years, you suspect the effect will become material. The facts are adequately disclosed in footnotes.
2.	Jordan Minerals recently decided to change its direction and spent the last 8 months developing business in the potash mining business. There are significant potential rewards but the company's management recognizes that there are significant risks in the business that could jeopardize the success of its existing mining business. Since starting the new venture, the company has had no success and some decline in profit. The facts are adequately disclosed in footnotes.
3.	You recently noticed that Janssen Technology Solutions routinely excludes their statement of cash flows in the company's annual financial statement. Their reasoning, as explained to you, is that the statements are confusing to their readers so they prefer to leave the information out.
4.	A group of longtime friends decided to try their hand at online art auctions and online trade in antiquities. Although their venture started out well enough, a market wide downturn in e-commerce sales abruptly plunged the start-up into the red. The future of the company looks bleak; both sales and cash position have declined substantially. If the market does not turn around soon, you think the company may not be able to continue to operate.
5.	The controller of a company you are auditing will not allow you to confirm the Receivable balances from any of its customers. However, the amounts of the Receivables are material in relation to the company's financial statements. You cannot use any other methods to check the Receivable balance.
6.	Your firm has been unusually busy so you ask another CPA firm to do about 30% of the audit for Abdoun's Arts, Inc. After a thorough review of their working papers, you are convinced that they did an excellent job on their portion of the audit. However, you are reluctant to take complete responsibility for their work.

Required:

For each situation, do the following:

A. Identify which of the conditions requiring a modification of or a deviation from an unqualified standard report is applicable.

B. State the level of materiality as immaterial, material, or highly material. If you cannot decide the level of materiality, state the additional information needed to make a decision.

C. Given your answers in parts a and b, state the type of audit report from the alternatives (If you have not decided on level of materiality in part b, state the appropriate report for each alternative materiality level).

(1)	Unqualified- standard wording	(5)	Qualified scope and opinion
(2)	Unqualified-explanatory paragraph	(6)	Disclaimer
(3)	Unqualified-modified wording	(7)	Adverse
(4)	Qualified opinion only

D. Based on your answer to part c., indicate which paragraphs, if any, should be modified in the standard audit report.

Also indicate whether an additional paragraph is necessary and its location in the report.

Answer rating: 100% (QA)

A Conditions requiring a modification of or a deviation from an unqualified standard report 1 Change in depreciation method This situation does not require a modification of or a deviation from an unq... View the full answer