Solutions Guide: This is meant as a solutions guide



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.

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