3-26(Objectives3-4,3-5,3-6,3-7,3-8) For the following independent situations, assume that you are the audit partner on the engagement:

1. A number of frozen yogurt stores have opened in the last few years and your client, YogurtLand, has experienced a noticeable decline in customer traffic over the past several months that has caused you to have substantial doubt about YogurtLand's ability to continue as a going concern.
2. Intelligis Electronics is a manufacturer of advanced electrical components. During the year, changes in the market resulted in a significant decrease in the demand for their products, which are now being sold significantly below cost. Management refuses to write off the products or to increase the reserve for obsolescence.
3. In the last 3 months of the current year, Oil Refining Company decided to change direction and go significantly into the oil drilling business. Management recognizes that this business is exceptionally risky and could jeopardize the success of its existing refining business, but there are significant potential rewards. During the short period of operation in drilling, the company has had three dry wells and no successes. The facts are adequately disclosed in footnotes.
4. Your client, Harrison Automotive, has changed from straight-line to sum-of-the-years' digits depreciation. The effect on this year's income is immaterial, but the effect in future years may be highly material. The change is not disclosed in the footnotes.
5. Circumstances prevent you from being able to observe the counting of inventory at Brentwood Industries. The inventory amount is material in relation to Brentwood Industries' financial statements. But, you were able to perform alternative procedures to support the existence and valuation of the inventory at year-end.
6. Approximately 20 percent of the audit of Lumberton Farms, Inc., was performed by a different CPA firm, selected by you. You have reviewed their audit files and believe they did an excellent job on their portion of the audit. Nevertheless, you are unwilling to take complete responsibility for their work.

Required

For each situation, do the following:

• Identify which of the conditions requiring a deviation from a standard unmodified opinion audit report is applicable, if any.
• 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.
• Given your answers in parts a. and b., state the appropriate audit report from the following alternatives (if you have not decided on one level of materiality in part b., state the appropriate report for each alternative materiality level):
  1. Unmodified opinionstandard wording
  2. Unmodified opinionexplanatory paragraph
  3. Unmodified opinionnonstandard report wording
  4. Qualified opinion onlyGAAP departure
  5. Qualified opinionscope limitation
  6. Disclaimer
  7. Adverse*

3-29 (Objectives 3-1, 3-3, 3-7, 3-9) The IAASB recently revised its standards related to audit reporting. ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements, requires the auditor's report to include the following paragraphs under the headings "Basis for Opinion" and "Auditor's Responsibilities for the Audit of the Financial Statements":

Basis for Opinion

We conducted our audit in accordance with ISAs. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in [the home country] and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Auditor's Responsibilities for the Audit of the Financial Statements

Our Objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

Read the preceding paragraphs to answer the following:

Required

• How does the information in the preceding paragraphs compare to the information in the Basis for Opinion and Auditor's Responsibility sections in the standard unmodified opinion audit report example for a nonpublic company shown in Figure 3-1 (p. 49)?
• How does the information in the preceding paragraphs compare to the information in the Basis for Opinion section in the standard unmodified opinion audit report example for a public company shown in Figure 3-3 (p. 54)?
• Discuss which of the three audit reports, in your opinion, provides greater auditor communications to users of the financial statements.