The following independent situations, assume that you are the audit partner on the engagement:
1. In the last 3 months of the current year, Oil Refining Company decided to change direction and go significantly into the oil drilling business. Management recognizes that this business is exceptionally risky and could jeopardize the success of its existing refining business, but there are significant potential rewards. During the short period of operation in drilling, the company has had three dry wells and no successes. The facts are adequately disclosed in footnotes.
2. Your client, Harrison Automotive, has changed from straight-line to sum-of-the years' digits depreciation. The effect on this year's income is immaterial, but the effect in future years is likely to be material. The facts are adequately disclosed in footnotes.
3. Toronto Technology Corporation has prepared financial statements but has decided to exclude the statement of cash flows. Management explains to you that the users of their financial statements find this statement confusing and prefer not to have it included.
4. Marseilles Fragrance, Inc. is based in New York but has operations throughout Europe. Because users of the audited financial statement are international, your audit firm was engaged to conduct the audit in accordance with U.S. auditing standards and International Standards on Auditing (ISAs).
5. The controller of Brentwood Industries, Inc. will not allow you to confirm the receivable balance from two of its major customers. The amounts of the receivables are material in relation to Brentwood Industries' financial statements. You are unable to satisfy yourself as to the receivable balances by alternative procedures.
6. Approximately 20% of the audit of Lumberton Farms, Inc. was performed by a different CPA firm, selected by you. You have reviewed their audit files and believe they did an excellent job on their portion of the audit. Nevertheless, you are unwilling to take complete responsibility for their work.
For each situation:
a. Identify which of the conditions requiring a modification of or a deviation from an unqualified standard report is applicable.
b. State the level of materiality as immaterial, material, or highly material. If you cannot decide the level of materiality, state the additional information needed to make a decision.
c. Given your answers in parts( a) and (b), state the appropriate audit report from the following alternatives (if you have not decided on one level of materiality in part b, state the appropriate report for each alternative materiality level):
1. Unqualified - standard wording 5. Qualified scope and opinion
2. Unqualified - explanatory paragraph 6. Disclaimer
3. Unqualified - modified wording 7. Adverse
4. Qualified opinion only
d. Based on your answer to part c, indicate which paragraphs, if any, should be modified in the standard audit report. Also indicate whether an additional paragraph is necessary and its location in the report.© BrainMass Inc. brainmass.com October 25, 2018, 9:36 am ad1c9bdddf
1. (a) footnote is enough, no modification; (b) materiality not a issue;( c) 1; (d) no modification.
2. (a) footnote is enough, no modification; (b) immaterial; (c) 1; no modification
3. (a) This is a material departure from gap and has a pervasive impact on the financial complexion (impacts many areas); (b) highly material; (c) 7; (d) the opinion paragraph would be modified and the basis for adverse opinion paragraph would be added for example:
Basis for Adverse Opinion:
Management has not included a cash flow statement for the year presented. Accounting principles generally accepted in the United States ...
Your discussion is 374 words and a reference. The type of report and sample language for modifying the report are given for those situations where it is needed.
Auditing: Material weakness, internal audit, change in control risk
1. Fisher, Inc. is a large corporation that is regularly audited by a public accounting firm. Fisher, Inc. also maintains an internal auditing staff.
Which do you think matters more to Fisher's board of directors: internal or external auditing? Why do you think so?
Which do you think matters more to Fisher's stockholders: internal or external auditing? Why do you think so?
2. The CEO of your company has asked you to help prepare for the upcoming company audit. One of the items the CEO has asked you to do is suggest a number of sources in which you could get information that would be needed to prepare the description of internal control in the audit working papers.
Prepare a memo that you will present to the CEO in which you do the following: Suggest the sources from which you can obtain information that would be needed to prepare the description of internal control in the audit working papers.
Explain what potential ethical and legal issues could be presented if these sources are not found.
Develop solutions for those issues.
3. Depending on the results of their tests of control, the auditors may restrict substitutive procedures.
Discuss and contrast the following concepts: the planned assessment of control risk
the revised assessment of the risk after tests of controls have been performed
4. It has come to the CEO's attention that Sally, a company salesperson, grants the rights to wholesalers to return unsold product. He asks you to discuss the following at the next board of directors meeting: In the system of internal control, are Sally's actions a significant deficiency or a material weakness?
Explain your reasoning and rationale.
5. This is the first year that you have audited Hurst & Johnson Corporation. You discovered that the company is carrying its property, plant, and equipment at appraisal values and determines depreciation on the basis of these values. This is considered a very large scope-limitation, and you have not been able to form an opinion on the financial statements taken as a whole.
Discuss the ethical issues involved with this situation.
Explain how you should handle this situation.
Explain what type of report you should issue and why.