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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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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.

DISCLAIMER OF OPINION, the auditors cannot form an opinion on an entity's financial statements. There is significant uncertainty, because sufficient competent evidence cannot be obtained of significant investments in the company held in a foreign company.

EXPLANATION: We were engaged to audit the books of the company for the year ended December 31, XXXX. However, we were unable to satisfy ourselves regarding the financial soundness or other wise of the investments made abroad by the company. The values of the investments enter into the assets of the company and the income thereof enters into the net income and cash flows of the company.

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

QUALIFIED OPINION: This opinion is issued because the results are not in conformity with GAAP. However, there is no need to issue an adverse opinion because this departure has been mentioned and explained in the notes to the financial statements.

EXPLANATORY NOTE: The Company has failed to capitalize lease assets and obligations that in our opinion should be capitalized in order to obey the rules of Generally Accepted Accounting Principles. If capitalized, property would increase by $xxxx as of December 31, XXXX additionally, net income would be increased by $YYYY and earnings per share would be decreased by $W. for the year then ended.

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.

ADVERSE OPINION: As the company is defending a lawsuit on product liability claims and has not recorded a minimum probable loss, even though the facts about the law suit are disclosed in notes to the financial statements, the financial statements do not present the entity's financial position and results of operations.

EXPLANATORY NOTE: As discussed in note T the company is defending a lawsuit on product liability and the company has not made any provision of the minimum probable settlement loss that has been advised by the lawyers. Because of this there has been an increase in the retained earnings to the extent of XXXX for the year ended December 31, XXXX.

Because of the effects of the matter discussed in the preceding paragraph, the financial statements referred to above do not present fairly, in all material respect., the financial position of the company as of December 31, XXXX and the results of its operations and its cash flows for the year then ended.

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.

DISCLAIMER OF OPINION: As the auditors were retained after the December 31 inventory-taking, the accounting records and ...

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.

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