Earlier this year, Dewey, Sample, & Guess, CPAs, completed an audit of Service Maintenance Corp (SMC), located in Fairfax, Virginia. SMC is a profit-oriented corporation and publishes financial statements for distribution to shareholders, and creditors. SMC is not currently publicly traded. The client's fiscal year-end is December 31, 2017; the audit firm finished fieldwork on March 15, 2019 and issued a standard unqualified audit report on April 6, 2018.

A peer review of the audit firm in the summer of 2018 found the following items:

1. During 2017, SMC changed its method of depreciating long-term assets and properly reflected the effect of the change in the current year's financial statements, restated the prior year's statements, and discussed the change in footnote 17 to the financial statements. The auditors were satisfied with SMC's justification for making the change.

2. SMC owns an 80% interest in CMS, located in San Diego, California. CMS has assets of $250,000 comprising 25% of SMC consolidated total assets as of December 31, 2017 and generated revenues of $2,500,000, comprising 30% of SMC consolidated total revenues for 2017. CMS was audited by Laid, Bach & Associates, CPAs, in La Jolla, CA. Dewey, Sample, & Guess found it impractical to review the Laid, Bach & Associates audit of CMS.

3. On April 1, 2018, an El Nino generated storm struck the San Diego metropolitan area and heavily damaged CMS. As the financial statements had already been submitted to the printers, SMC believed that it was unnecessary to do anything with respect to this loss.

4. During 2017, SMC suffered a major downturn in business and lost two of its major customers comprising 40 % of its revenue stream. Consequently, most of the liquidity and solvency indicators for SMC have deteriorated rapidly. SMC has taken drastic action to reduce negative cash flow and had disclosed this information in note 18 to the financial statements.

5. Finally, SMC had adopted section ASC 606 regarding revenue recognition. ASC 606 is effective for fiscal years beginning after December 15, 2017. Adoption of ASC 606 was discussed in note 19 to the financial statements.

Required:

A. For each paragraph numbered 1 through 5, identify whether each matter should have been addressed in the audit report, “yes” or “no” and, if yes, how the report should have been modified (that is, briefly describe what language should have been added). Organize your response as follows:

Paragraph # Yes or No. If Yes, language to add:

B. Given the foregoing, what type of opinion did Dewey, Sample, and Guess issue on SMC’s financial statements and what type of opinion should have been issued?

Did Issue: Should have issued:

Answer rating: 100% (QA)

Paragraph 1 A Yes Key Audit Matters Key audit matters are those matters that in our professional judgment were of most significance in our audit of the financial statements of the current periodThese ... View the full answer