ADM 3349 Lecture Notes - Lecture 1: Financial Statement, Audit Evidence

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22 Jan 2018

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1. Bankers who are processing loan applications from companies seeking large loans will probably

ask for financial statement s audited by an independent PA because they generally have

potential conflict between managers and seek for opinions from auditing firms.

2. Auditors should comply standard of GAAP to audit company financial statement, not

accounting CPA committee or Financial statement board.

3. PA finds that the client has not capitalized a material amount of leases in the financial

statements. When cosiderig the aterialit of this departure fro GAAP, the PA’s reportig

options are qualified opinion or adverse opinion.

4. An auditor has found that the client is suffering financial difficulty and that the going-concern

status is seriously in doubt. The client has not placed good disclosure in the financial statements.

Which of the following audit reporting alternatives must the PA choose? ----It is departure from

GAAP Qualified opinion or adverse opinion

5. An emphasis of a matter paragraph inserted in an audit report causes the report to be

characterized as unqualified opinion report The report is clear, emphasis on matters just to

draw users attention, have no impact on opinion report.

6. 3.1. Auditors are interested in having independence in appearance because they want the

public at large to have confidence in the profession

7. 3-7. PA Smith is the auditor of Ajax Corporation. Her audit independence will not be considered

impaired if she ows  dollars’ worth of the shares of Periles Corporatio, which is

otrolled  Aja as a result of Aja’s owership of  peret of Periles’s shares, ad

Periles otriutes  peret of the total assets ad ioe i Aja’s fiaial stateets.

8. 3-11. A group of investors sued Anderson, Olds & Watershed, Pas, for alleged damages suffered

when the company they held common shares in went bankrupt. In order to avoid liability under

the common law, AOW must prove which of the following? The audit was conducted under

GAAP and related guideline.

9. 3-13. A PA’s idependence would not be considered impaired if he had owned common shares

of the audit client but sold them before the company became a client

10. 3-14. When a Pa knows that a tax client has skimmed cash receipts and not reported the income

on his federal income tax return, but he signs the return as a PA who prepared the return, that

PA has violated which rule of professional conduct? Integrity and objectivity

Case 6-2 Bill Deburger in charge accountant

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Various Reporting Situations [CLOs: 1, 2, 5]

Assume that Stanford CPAs encountered the following issues duringvarious audit engagements in 2014:

Stanford conducted the audit of Luck, a new client this pastyear. Last year, Luck was audited by another CPA, who issued anunmodified opinion on its financial statements. Luck is presentingfinancial statements for 2013 and 2014 in comparative form.

One of Stanfordâs clients is RealCo, a real estate holdingcompany. Assume that RealCo experienced a significant decline inthe value of its investment properties during the past year becauseof the downturn in the economy and has appropriately recognizedthat decline in market value under GAAP. Stanford wished toemphasize the decline in the economy and its impact on RealCoâsfinancial position and results of operations for 2014 in its auditreport.

For the past five years, Stanford has conducted the audits ofTechTime, a company that provides technology consulting services,and has always issued unmodified opinions on its financialstatements. Based on its 2014 audit, Stanford believes that anunmodified opinion is appropriate; however, Stanford did note thatTechTime reported its third consecutive operating loss and hasexperienced negative cash flows because of the inability of some ofits customers to promptly pay for services received.

Stanford has assisted Cardinal Inc. with the preparation of itsfinancial statements but has not audited, compiled, or reviewedthose financial statements. Cardinal wished to include thesefinancial statements in a communication that would describeStanfordâs involvement in the preparation of the financialstatements. Stanford believes that Cardinalâs communication isadequate and appropriately describes Stanfordâs limited role in thepreparation of the financial statements.

Trees Inc. presents summary financial information along with itsfinancial statements. The summary financial information has beenderived from the complete set of financial statements that Stanfordhas audited (and issued an unmodified opinion on the completefinancial statements). A lender has engaged Stanford to evaluateand report on Treesâ summary financial information. Stanfordbelieves that summary financial information is fairly stated inrelation to Treesâ complete financial statements.

Stanford believes that some of the verbiage in PlunkettâsManagement Discussion & Analysis section is inconsistent withthe firmâs financial statements. Stanford has concluded thatPlunkettâs financial statements present its financial position,results of operations, and cash flows in accordance with GAAP andhas decided to issue an unmodified opinion on Plunkettâs financialstatements.

Oil Patch is a client in the energy industry that is required topresent supplementary oil and gas reserve information. Stanford hasperformed certain procedures regarding this information andconcluded that it is presented in accordance with the FinancialAccounting Standards Board (FASB) presentation guidelines and doesnot appear to depart from GAAP. Based on the audit, Stanford plansto issue an unmodified opinion on Oil Patchâs financialstatements

Following are two independent situations.

A. Grinner and Greeter, CPAs, were engaged to perform an audit ofthe financial statements of Happy, Inc. Happy's management wouldnot allow Grinner and Greeter to confirm any of the accountsreceivable. All other auditing procedures were performed asconsidered necessary by Grinner and Greeter and no issues wereencountered. However, Grinner and Greeter were unable to satisfythemselves with regard to the balance in accounts receivable.

B. Tick and Tie, CPAs, were performing their annual audit ofJohnson Manufacturing Company. Johnson is currently being sued for$2,000,000 related to an alleged defective product that they soldto a customer. Johnson's legal counsel has told Tick and Tie thatit is probable that Johnson will lose the suit and have to pay theentire $2,000,000. Johnson's management has included information inthe footnotes about the lawsuit. However, they have not recordedany loss or liability in the income statement or balancesheet.

Required:

For each of the two independent situations, state what type ofopinion should be issued on the company's financial statements.Briefly explain your rationale. Finally, state which paragraphs, ifany, of the standard report would be modified.

Note : I have the answer but I want to paraphraseit.

âTha answer is :

A. The company has imposed a scope limitationon Grinner and Greeter. Although it is possible to issue aqualified opinion for a less material scope limitation, disclaimersof opinion are more appropriately issued for client-imposed scopelimitations than for circumstance-imposed scope limitations. Forthe disclaimer of opinion, (1) the introductory paragraph would bemodified to state that auditors were engaged to audit thefinancial statements and delete the sentence referring to theauditors' responsibility for the financial statements, (2) thescope paragraph would be omitted, (3) an additional paragraph wouldbe added to describe the scope limitation, and, (4) the opinionparagraph would be modified to express a disclaimer ofopinion.

B. Because Johnson Manufacturing has not properlyrecorded a loss and a liability, the financial statements are notin conformity with generally accepted accounting principles.Therefore, depending on the overall materiality and pervasivenessof the misstatement, Tick and Tie should issue either a qualifiedor adverse opinion. In each case, a third paragraph would be addedto the report to explain the departure from GAAP and the opinionparagraph would be modified to express either a qualified opinionor an adverse opinion.

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Chapter 15

1. Consider the following statements:

I. For the last several years, both the FinancialAccounting Standards Board (FASB) and the

International Auditing and Assurance Standards Board (IAASB)have been considering possible

changes to the standard unqualified audit report.

II. The audit report is modified to five paragraphs as a resultof another audit firm performing part of

the financial statement audit (Refer to Shared Reporttopic).

a. I is true; II is true

b. I is true; II is false

c. I is false; II is true

d. I is false; II is false

2. Consider the following statements:

I. Inconsistent application of accounting principles is a GAAPviolation and would result in a

qualified or adverse audit opinion.

II. For a change in accounting principles thatmanagement does justify to the auditor, the

auditor will likely choose between a qualified or an adverseopinion.

a. I is true; II is true

b. I is true; II is false

c. I is false; II is true

d. I is false; II is false

3. Consider the following statements:

I. The failure of a client to include a Statement of Cash Flowswill result in the issuance of a

disclaimer of opinion by the auditor.

II. The auditor will issue an unqualified opinionon Internal Controls over Financial Reporting (ICFR)

if the auditor has identified only one material weakness inICFR.

a. I is true; II is true

b. I is true; II is false

c. I is false; II is true

d. I is false; II is false

4. In which of the following instances would an auditor mostlikely issue a standard unqualified opinion

WITH an explanatory paragraph?

a. Management disclosures are missing or inadequate.

b. There is substantial doubt about the entityâs ability tocontinue as a going-concern.

c. There is a significant limitation on the scope of theengagement.

d. There is an immaterial deviation from GAAP related tocapitalizing repairs.

5. Which one of the following is an example of the contents ofan opinion paragraph found in an audit

report?

a. âWe have audited â¦â

b. âNothing came to our attentionâ¦â

c. âThe financial statements referred to above present fairlyâ¦â

d. âAn audit includes examining, on a test basis â¦â

6. A client company has a history of negative cash flow trendsand continuing losses. What would this

seem to involve?

a. GAAP problem

b. Going concern.

c. Lack of consistency.

d. Lack of independence.

7. An audit of the Flagler Company, a diamond mining company,brings to light the fact that its

equipment has been marked up to the ownersâ expectation ofmarket values. Such a situation will

most likely result in which type of report?

a. Disclaimer.

b. Review.

c. Adverse.

d. Unqualified, with explanatory paragraph.

8. In which of the following instances would an auditor issue adisclaimer of opinion?

a. Lack of consistency.

b. GAAP problem.

c. There is a significant limitation on the scope of theengagement.

d. The principle auditor decides to make reference to anotherauditor who has issued an unqualified

audit report.

9. When might an auditor modify the introductory paragraph andreplace the scope paragraph with an

explanatory paragraph? The ANSWER is A.

a. When a pervasive scope limitation exists.

b. When there is substantial doubt about going-concern.

c. When the auditor lacks independence.

d. When there is an emphasis of a matter.

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ADM 3349 Lecture Notes - Lecture 1: Financial Statement, Audit Evidence

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