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. For the past five years, Clark CPAs has audited the financialstatements of a manufacturing company. During this period, theaudit scope was limited by the client as to the observation of theannual physical inventory. Because Clark CPAs considers theinventories to be material and was not able to satisfy the auditrequirements by using other auditing procedures, the firm wasunable to express an unmodified opinion on the financial statementsin each of the five years.
The CPA was allowed to observe physical inventories for the currentyear ended December 31, 2015, because the client’s bank would nolonger accept the audit reports. However, to minimize audit fees,the client requested that the CPA not extend audit procedures tothe inventory as of the beginning of the year, January 1, 2015.Which type of audit report would you suggest be issued this yearand why?


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I have the answer, could you please paraphrase it ?

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The scope of the audit has been restricted by inability toassess the inventory. Based on the information,this appears to behighly material or material, depending upon the auditor'spreliminary judgment about materiality. Because the auditor wasunable to obtain sufficient appropriate evidence on the beginninginventories, it would be necessary to issue either a qualified ordisclaimer of opinion on the income statement and statement of cashflows as well as the beginning of the balance sheet. The choice ofa qualified or disclaimer opinion would depend upon materiality. Ifhighly material, then a disclaimer is the best choice. If material,then a qualified scope and opinion might be more appropriate. Anunqualified opinion could be issued for the current period balancesheet.

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Trinidad Tremblay
Trinidad TremblayLv2
28 Sep 2019

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For the past five years, Clark CPAs has audited the financialstatements of a manufacturing company. During this period, theaudit scope was limited by the client as to the observation of theannual physical inventory. Because Clark CPAs considers theinventories to be material and was not able to satisfy the auditrequirements by using other auditing procedures, the firm wasunable to express an unmodified opinion on the financial statementsin each of the five years.
The CPA was allowed to observe physical inventories for the currentyear ended December 31, 2015, because the client’s bank would nolonger accept the audit reports. However, to minimize audit fees,the client requested that the CPA not extend audit procedures tothe inventory as of the beginning of the year, January 1, 2015.Which type of audit report would you suggest be issued this yearand why?

1. For each of the following independent situations (a – k),describe the most appropriate course of action that the auditorsshould take.

A. While reviewing audit documentation, Tyson Michaels, apartner at K&O was reviewing working papers as part of thefirm’s system of quality control. Tyson noted that after releasingan audit report related to the financial statements of a publiclytraded client, it does not appear that any tests were conducted toevaluate the need for impairment of the carrying value of theCompany's property, plant, and equipment. These tests are importantwith respect to supporting the audit opinion.

B. Prior to the audit completion date (April 1, 2015), anauditor learned that their audit client Bubbagump Inc., haddeclared a significant dividend payable to its shareholders. Thisdividend was declared on March 14, 2015, to be paid to Bubbagump’sshareholders of record on May 16, 2015.

C. Pat Colt completed the December 31, 2014, audit of Manningand issued an unmodified opinion on Manning's financial statementsdated March 15, 2015. Colt's opinion was released, along withManning's financial statements, on March 21, 2015. During a reviewof Manning's first quarter 10-Q in late April, Colt became aware ofthe company's settlement with a customer over a product warrantylawsuit; this case had been settled on March 17, 2015. AlthoughColt had received the necessary letter from Manning's attorneys,the letter arrived prior to the settlement of the case and did notmention this development. After reviewing the information relatedto the settlement, Colt does not believe that the settlement ismaterial to Manning's financial condition or results of operationsand believes the opinion on Manning's financial statements is stillsupportable.

D. During a PCAOB inspection, it was determined that WKRP, LLPhad not adequately documented their rationale for not observing thephysical inventory count in its audit of King Manufacturing. Thisdiscovery occurred over a full year after the audit report releasedate. Lebron McWhiney, the lead engagement partner conceded thatthe inventory observation had not occurred and alternativeprocedures were not available due to the client’s accounting recordretention policies. In discussions with the PCAOB investigatorsLebron noted that the rationale, although not documented, was thatKing’s year-end inventory is quantitatively immaterial, at just 1%of total assets.

E. Drew Allison is conducting the audit of Anderson Inc. as ofDecember 31, 2014. At the beginning of the evidence gathering,Allison becomes aware that one of Anderson's major customers(Jones) is experiencing significant financial difficulties. Jonesnormally accounts for 5 percent of Anderson's net sales. Afterperforming the necessary procedures, Allison believes that $2.8million of Jones's receivable balance will ultimately becomeuncollectible. Allison further believes this amount is material toAnderson's financial condition and results of operations.

F. Charles Carmelo is completing the December 31, 2014, audit ofNugget Company. As part of the final procedures, Carmelo hasrequested representations from Nugget's management regarding theirassertion as to the fairness of the financial statements and otherimportant matters addressed by professional standards on February5. Because Nugget's management is attending an analyst briefing inthe upcoming week, Carmelo receives these signed representationsdated February 9, 2015. Because Carmelo had already completed allof the important procedures he released his auditor’s report, datedFebruary 5, 2015, with the financial statements on February 6.

G. Gruden LLP, was auditing Raider Company for the year endedDecember 31, 2014. Gruden plans on completing the audit by February17, 2015. On January 17, 2015, Gruden LLP learned that RaiderCompany activated a portion of its line of credit on January 5,2015, by borrowing $2.5 million. This additional obligationincreased Raider Company's long-term liabilities by 10 percent.

H. Cameron Alta completed the December 31, 2014, audit of SaxeCompany on February 10, 2015. Saxe is planning to release itsfinancial statements, along with Alta's opinion on these financialstatements and internal control over financial reporting, onFebruary 17, 2015. On February 12, 2015, a flood in one of Saxe'swarehouses located in the Gulf Coast region destroyed more than $10million of inventory. The extent to which this loss is recoverablethrough Saxe's insurance is unlikely, Alta believes that this losscould have a material impact on Saxe's financial condition andresults of operations.

I. During the audit of Glomco, Angel Myron identified a numberof misstatements. These misstatements are not material in dollaramount, do not appear to represent any discernable pattern, and donot represent fraudulent activity. As a result, Myron has decidedthat Glomco's financial statements do not need to be adjusted toreflect the effect of these misstatements.

J. Crismus and Stori, LLP is auditing Frozen Pole Desserts (FPD)for the year ended December 31, 2014. On February 9, 2015, theaudit partner in-charge Ralphy, learned of the following eventsduring his meeting with FPD's chief operating officer. A classaction lawsuit was brought against FPD by some of its formeremployees for workplace discrimination. An attorney on behalf of aclass of employees filed the lawsuit on January 10, 2015. Theletter from FPD's attorneys suggested that the amounts are notestimable and the likelihood of a negative outcome cannot bedetermined at this time.

K. Following the completion of the 2014 audit (including therelease of the audit report) of Blankenship Corporation, bySeeanSee, Muzik, and Fakdurry, LLC (SMF). Reese Jill, SMF’s auditpartner met with the manager on the audit engagement to conduct apostmortem on the engagement and identify how changes inBlankenship's operations noted during the most recent audit mayaffect future audits. During this review, Jill became aware thatBlankenship's process for evaluating potential impairment ofgoodwill related to an acquisition made by Blankenship during themost recent year had been considered and calculated by the auditteam, but for unknown reasons the adjustment had not been proposedto the client. Thus, the impairment had not been properly disclosedor accounted for in the financial statements. Jill believes thatthe results of the procedure is important in supporting the opinionon Blankenship's financial statements and notes that Blankenship’smanagement would probably be receptive to adjusting thefinancials.

Required: Unless otherwise noted, assume that each scenarioaffect (are material) to the Company’s financial statements, andthere are persons who continue to rely on the financial statements.For each of the preceding items, determine:

I. whether the event described should be classified as:

A. Subsequent Event

B. Subsequently Discovered Event

C. Omitted Procedure

D. None of the above

II. what actions the auditor should take after the firm'squality review identified these issues:

1) Disclosure in financial statements

2) Adjustment to and/or disclosure in the financialstatements

3) No further action is necessary (specific auditprocedures)

4) Determine if alternative procedures are available, if so takeaction 5, if procedures are not available, withdraw the auditor’sreport

5) Perform procedures related to the item and revise theauditor’s report date if necessary

6) Perform procedures related to the items and if facts wouldresult in revision of auditors’ report or financials, then notifyindividuals relying on financials and issue revised financialswhich provide disclosure of facts

7) Not applicable

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 Stanford’s 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 RealCo’sfinancial 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 describeStanford’s involvement in the preparation of the financialstatements. Stanford believes that Cardinal’s communication isadequate and appropriately describes Stanford’s 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 Trees’ summary financial information. Stanfordbelieves that summary financial information is fairly stated inrelation to Trees’ complete financial statements.

Stanford believes that some of the verbiage in Plunkett’sManagement Discussion & Analysis section is inconsistent withthe firm’s financial statements. Stanford has concluded thatPlunkett’s financial statements present its financial position,results of operations, and cash flows in accordance with GAAP andhas decided to issue an unmodified opinion on Plunkett’s 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 Patch’s financialstatements

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