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Choosing the Type of Audit Opinion: a practical application

16-41 (Choosing the Type of Opinion) Several independent audit situations are presented here. Assume that everything other than what is described would have resulted in an unqualified opinion.

Required

Indicate the type of opinion you believe should be expressed in each situation, and explain your choice. If an explanatory paragraph is needed, indicate whether it should precede or follow the opinion paragraph.

a. The auditor was unable to obtain confirmations from two of the client's major customers that were included in the sample. These customers wrote on the confirmation letters that they were unable to confirm the balances because of their accounting systems. The auditor was able to become satisfied by other audit procedures.

b. The client treated a lease as an operating lease, but the auditor believes it should have been accounted for as a capital lease.The effects are material.

c. The client changed from FIFO to LIFO this year.The effect is material. Assume:
1. The change was properly accounted for, justified, and disclosed.
2. The change was properly accounted for and disclosed, but was not properly justified.

d. The client restricted the auditor from observing the physical inventory. Inventory is a material item.

e. The client is engaged in a product liability lawsuit that is properly accounted for and adequately described in the footnotes. The lawsuit does not threaten the going concern assumption, but an adverse decision by the court could create a material obligation for the client.

f. The status of the client as a going concern is extremely doubtful. The problems are properly described in the footnotes.

g. One of your client's subsidiaries was audited by another audit firm, whose opinion was qualified because of a GAAP violation.You do not believe that the GAAP violation is material to the consolidated financial statements on which you are expressing an opinion.

h. You are convinced that your client is violating another company's patent in the process of manufacturing its only product.The client will not disclose this, because it does not want to wave a red flag and bring this violation to the other company's attention.

i. The client, with reasonable justification, has changed its method of accounting for depreciation for all factory and office equipment.The effect of this change is not material to the current year financial statements, but is likely to have a material effect in future years. The client's management will not disclose this change because of the immaterial effect on the current-year statements.You have been unable to persuade management to make the disclosure.

Solution Preview

Audit opinions:

a. CPA was able to satisfy him/herself that the company amounts were reasonable. Opinion can remain unqualified.

b. Qualified opinion - not in compliance with GAAP (generally accepted accounting principles) - stating the financial effect of the departure.

c. 1. Qualified opinion referenced to the footnote for further disclosure. 2. I don't understand what 'not properly justified' means, but assume that the report would state the reason why the change was not properly justified, in addition to referring the reader to the footnote.

d. Disclaimer of opinion due to the unknown material effects of ...

Solution Summary

The solution is a 400 word discussion about specific opinions and other information as it is applied by CPA firms conducting financial audits.

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