Solutions Guide: This is meant as a solutions guide. Please try reworking the
questions and reword the answers to essay type parts so as to guarantee that your
answer is an original. Do not submit as your own.
Items 1-6 present various independent factual situations an auditor might encounter in
conducting an audit. For each situation assume:
(1) the auditor is independent (2) the auditor previously expressed an unqualified opinion
on the prior years financial statements. (3) Only single-year (not comparitive) statements
are presented for the current year. (4) The conditions for an unqualified opinion exist
unless contradicted in the factual situations. (5) The conditions stated in the factual
situations are material. (6) No report modifications are to be made except in response to
the factual situations.
Items:
1-In auditing the long-term investments account, an auditor is unable to obtain audited
financial statements for an investee located in a foreign country. The auditor concludes
that sufficient appropriate audit evidence regarding this investment cannot be obtained.
2-Due to recurring operating losses and working capital deficiencies, an auditor has
substancial doubt about an entity's ability to continue as a going concern for a reasonable
period of time. However, the financial statement disclosures concerning these matters are
adequate.
3-A principle auditor decides to take responsibility for the work of another CPA who
audited a wholly owned subsidiary of the entity and issued an unqualified opinion. The
total assets and revenues of the subsidiary represent 17 percent and 18 percent,
respectively, of hte total assets and revenues of the entity being audited.
4-An entity issues financial statements that present financial position and results of
operations but omits the related statement of cash flows. Management discloses in the
notes to the financial statements that it does not believe the statement of cash flows to be
useful financial statements.
5-An entity changes its depreciation method for production equipment from straight-line
to a units-of-production method based on hours of utilization. The auditor concurs with
the change, although it has a material effect on the comparability of the entity's financial
statements.
6- An entity discloses certain lease obligations in the notes to the financial statements. the
auditor believes that the failure to capitalize these leases is a departure from generally
accepted accounting principles.
REQUIRED: List A represents the types of opinion the auditor ordinarily would issue
and List B represents the report modifications (if any) that would be necessary. Select as
the best answer for each situation (items 1-6) the type of opinion and modifications, if
any, the auditor would normally select. The types of opinions in List A and the report
modifications in List B may be selected once, more than once, or not at all.
LIST A- (A) An "except for" qualified opinion. (B) An unqualified opinion. (C) An
adverse opinion. (D) a disclaimer of opinion. (E) Either an "except for" qualified opinion
or an adverse opinion. (F) Either a disclaimer of opinion or an "except for" qualified
opinion. (G) Either an adverse opinion or a disclaimer of opinion.
LIST B- (H) Describe the circumstances in an explanatory paragraph preceding the
opinion paragraph without modifying the three standard paragraphs. (I) Describe the
circumstances in an explanatory paragraph following the opinion paragraph without
modifying the three standard paragraphs. (J) Describe the circumstances in an
explanatory paragraph preceding the opinion paragraph, and modify the opinion
paragraph. (K) Describe the circumstances in an explanatory paragraph following the
opinion paragraph, and modify the opinion paragraphs. (L) Describe the circumstances in
an explanatory paragraph preceding the opinion paragraph, and modify the scope and
opinion paragraphs. (M) Describe the circumstances in an explanatory paragraph
following the opinion paragraph, and modify the scope and opinion paragraphs. (N)
Describe the circumstances within the scope paragraph without adding an explanatory
paragraph. (O) Descirbe the circumstances within the opinion paragraph without adding
an explanatory paragraph. (P) Describe the circumstances within the scope and opinion
paragraphs without adding an explanatory paragraph. (Q) Issue the standard auditor's
report without modification
1.
(F,L) A situation in which an auditor is unable to obtain audited
financial statements for an investee represents a scope limitation. Scope
limitations lead to either a qualified opinion or a disclaimer of opinion.
A decision as to whether the auditors should qualify or disclaim the
opinion is dependent upon their assessment of the importance of the
scope limitation.
2.
(B,I) Substantial doubt about an entity's ability to continue as a going
concern leads to either an unqualified opinion with an explanatory
paragraph, or a disclaimer. Because the combination of either an
unqualified opinion or a disclaimer is not included in list A, an
unqualified opinion is best. Given a situation in which an unqualified
opinion is to be provided, the appropriate modification of the report is an
explanatory paragraph following the opinion paragraph.
3.
(B,Q) A standard unqualified opinion is appropriate in circumstances in
which a principal auditor takes responsibility for the work of another
auditor.
4.
(A,J) When a company issues financial statements that purport to
present financial position and results of operations, but omit the related
statement of cash flows, the auditor will normally conclude that the
omission requires a qualified opinion. Qualified opinions for departures
from generally accepted accounting principles require an explanatory
paragraph preceding the opinion paragraph and a modified opinion
paragraph.
5.
(B,I) When an auditor agrees with a change in accounting principles, a
lack of consistency results in an unqualified opinion with an explanatory
paragraph following the opinion paragraph, with no modification of the
three standard paragraphs.
6.
(E,J) Departures from generally accepted accounting principles result
in either a qualified opinion or an adverse opinion, based on the
materiality of the departures. In deciding whether a qualified or an
adverse opinion should be issued, the auditors consider the materiality of
the departures. Regardless of whether a qualified opinion or an adverse
opinion is issued, an explanatory paragraph precedes the opinion
paragraph, and the opinion paragraph is modified.