Report Situations & Departures From GAAP

Chapter 12, Problem 12.37 Various Report Situations.

Assume the auditors encountered the following separate situations when deciding upon the report to issue for the current-year financial statements.

1. The auditor decided that sufficient competent evidence could not be obtained to complete the audit of significant investments the company held in a foreign company.

2. The company failed to capitalize lease assets and obligations, but explained them fully in the notes to the financial statements.

3. The company is defending a lawsuit on product liability claims. (Customers allege that power saw safety guards were improperly installed.) All the facts about the lawsuit are disclosed in notes to the financial statement, but the auditors believe the company ought to record a minimum probable settlement loss the lawyers say is likely.

4. The company hired the auditors after the December 31 inventory-taking. The accounting records and other evidence are not reliable enough to enable the auditors to have sufficient evidence about the proper inventory amount.

5. The oil company client is required by FASB to present supplementary oil and gas reserve information outside the basic financial statements. The auditors find that this information, which is not required as a part of the basic financial statements, is omitted.

6. The auditors are principal auditors of the parent company, but they decide not to take responsibility for the work done by other auditors on three subsidiary companies included in the consolidated financial statements, The principal auditors reviewed the other auditors' work and reputation, but they still do not want to take responsibility for the other auditors' portion, which amounts to 32 percent of the consolidated assets and 39 percent of the consolidated revenues.

7. The company changed its depreciation method from units-of-production to straightline, and the auditor believes the straight-line method is the most appropriate in the circumstances. The change, fully explained in the notes to the financial statements, has a material effect on the year-to-year comparability of the comparative financial statements.

8. Because the company has experienced significant operating losses and has had to obtain waivers of debt payment requirements from its lenders, the auditors decide that there is substantial doubt that the company can continue in existence as a going concern. Even so, the auditors want to render a positive assurance report because the company has fully described all the problems in a note in the financial statements.

1. What kind of opinion should the auditors write for each separate case?
2. What other modification(s) or addition(s) to the standard report is (are) required for each separate case?

Chapter 12, Problem 12.48, Departures from GAAP

On January 1, Graham Company purchased land (the site of a new building) for $100,000. Soon thereafter, the Highway Department announced a new feeder roadway route that would run alongside the site. The effect was a dramatic increase in local property values. Nearby comparable land sold for $700,000 in December of the current year. Graham shows the land at $700,000 in its accounts, and, after reduction for implicit taxes at 33 percent, the fixed asset total is $400,000 larger, with the same amount shown separately in a stockholders' equity account titled "Current value increment." The valuation is fully disclosed in a footnote to the financial statements, along with a letter from a certified property appraiser attesting to the $700,000 value.

1. Write the appropriate audit report, assuming you believe the departure from GAAP is material but not enough to cause you to give an adverse opinion.
2. Write the appropriate report, assuming you believe an adverse opinion is necessary.
3. For discussion: Should you (could you) issue a report conforming to Rule 203 of the AICPA Code of Professional Conduct?

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Solution Summary

This solution shows different report situations in auditing and evaluates the departures from the GAAP, along with how auditors should respond to the separate cases. The total solution is approximately 2,280 words long.