For each of the following situations, indicate which type of audit report you would issue if you

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Question:

For each of the following situations, indicate which type of audit report you would issue if you were the partner in charge of the engagement and explain.

a. Although the audit of Coltrane Enterprises occurred without incident and you are prepared to issue an unqualified opinion, you discover after the engagement that one of the partners in your firm (who did not have any direct ties to the engagement) holds a material investment in Coltrane’s common stock.

b. This is the first year you have audited Monk & Co.’s financial statements. The previous auditors have gone out of business and their level of cooperation with your auditors is negligible. A few of your conclusions rest on the old auditors’ work.

c. Due to a conflict of interest discovered between another audit firm and Jamal Corp., your firm was brought in to audit Jamal’s financial statements after the end of its fiscal year. The old firm is cooperating fully with your auditors and you are prepared to issue an unqualified opinion except that you could not physically count Jamal’s ending inventory. You have, however, satisfied yourself through other audit procedures that the inventory balance is fairly presented.

d. Your audit of Mingus and Evans, Inc. revealed no material departures of management’s assertions from GAAP. However, management used the purchase method, as opposed to the more conservative pooling method, to account for a late fourth-quarter acquisition. The treatment inflated their assets through a substantial increase in their goodwill account. Management explained their choice by saying that they wanted to boost their accounting numbers in anticipation of a big equity issue they plan to make after the financial statements are released.

e. Despite your urgings, the management of Parker Co., an arms dealer, refuses to allow you to examine some details on their customer base. As a result, you cannot be sure of the value of their receivables.

f. In the course of your audit of Rollins and Gordon, Ltd., you discover that the company recorded its office building purchase in a land account and, therefore, does not depreciate it. The land account makes up about 10 percent of the total assets of the firm.

g. Abigail Co.’s largest asset, a portfolio of mortgage-based securities that makes up about 60 percent of the assets of the company, is carried at cost although a substantial market for the securities exists. The difference between the carrying value and the market value is currently immaterial.

h. Holiday Co.’s audit went without incident except that you are convinced that its deteriorating cash position and its poor position in a declining industry will make it highly unlikely that it will be in business this time next year.