Types of Audit Report solution(1) (3) PDF

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ACCT 4225 Types of Audit reports

Please make the assumption that each of these scenarios is independent of one another. Comment on the type of audit report you would be most comfortable issuing and the additional information you would include in the audit report (if any). 1. The audit of the financial statements of Risky Business has been completed. You discovered when you were auditing the equipment account that a new photocopier was acquired during the year and inappropriately recorded as an operating lease. You have prepared a working paper outlining the differences in the two approaches and have concluded that the results are immaterial. Solution: The overall effect is not material. An unqualified opinion can be issued. 2. The audit of the financial statements has been completed. Assume that Risky Business is a private company that had previously been reviewed by your firm. Risky Business is hoping to go public in the next few years and thus organized to have an audit of the financial statements completed. Solution: The auditors of Risky Business must determine whether Risky Business wants an unqualified opinion. If so, the auditors must audit opening numbers as well as the current year’s information to ensure that amounts recorded on the statement of operations is appropriate. (Cutoff for the current year is accurate). This will mean that Risky will have to spend more $$$ to have an audit completed. Upon completion of the audit and assuming that the auditors have no difficulty with auditing the opening numbers, the audit report will be unqualified with an Other Matters paragraph. The Other Matters paragraph will follow the Opinion paragraph indicating that the previous year’s financial statements were not audited. If Risky chooses not to have the opening amounts audited, then likely a denial/disclaimer of opinion will have to be issued for the current year because of the auditor’s inability to audit the opening numbers. On a go forward basis, in the following year the auditors will be able to issue an unqualified audit opinion. 3. The audit of the financial statements has been completed. Assume that Risky Business is a private company that had been previously audited by another firm. There were no difficulties encountered during the course of the audit and the working papers have been appropriately reviewed by all with no outstanding issues. Solution: This will result in a standard unqualified audit opinion. The audit report will include an Other Matters paragraph following the opinion paragraph that will indicate that the previous year’s financial statements were audited by another firm of chartered accountants.

4. The audit of the financial statements has been completed. When completing the audit of the accounts receivable Risky Business asked that you not send an accounts receivable confirmation to a particular customer because there were still contentious legal issues being resolved. You were able to satisfy yourself with alternative audit procedures. Solution: Standard unqualified audit report assuming that the auditors were able to satisfy all of their evidence requirements. 5. The audit of the financial statements of Risky Business has been completed. When completing the working paper file of Risky Business many of the ratios that were calculated indicated an issue with going concern. The partner in charge has asked that a note be drafted and included in the financial statements. The client has refused. Solution: This would result in a qualified audit opinion because of a GAAP departure (no note disclosure with respect to going concern). As long as the financial statements don’t need to be prepared using disposal values then a qualified opinion is appropriate. 6. The audit of the financial statements has been completed. When completing the working paper file of Risky Business many of the ratios that were calculated indicated an issue with going concern. The partner in charge has asked that a note be drafted and included in the financial statements. Risky Business’s COO has agreed and has prepared a note to the financial statements. Solution: This would result in an unqualified audit opinion. An emphasis of matter paragraph would follow the opinion paragraph drawing the readers’ attention to the note. 7. The audit of the financial statement has been completed. A necessary audit procedure is to have the client sign a letter representing that there are no outstanding legal obligations. The chief executive of Risky Business has refused to sign the letter of representation. Solution: This would result in a qualified opinion because of a scope limitation. The letter of representation is a requirement for all audit and review engagements to ensure that there is evidence in the working paper file that management representations have been substantiated in writing. If the auditor believed that the letter of representation was not signed by management because management was trying to hide a piece of evidence then there could be an argument to render a denial or disclaimer of opinion. 8. The audit of the financial statements has been completed. You have completed the development and production asset section of the working paper file and have concluded that the amount of impairment that Risky Business has recorded is not appropriate. Risky Business does not want to record the additional amount arguing that the value of the impairment is an estimate and how do you really know for sure what the amount of the impairment should be. The additional amount that needs to be recorded is material to the financial statements and can be explained in the auditors’ report.

Solution: This would result in a qualified opinion because of a GAAP departure. The amount is material but can be easily explained in the audit report. 9. The audit of the financial statements has been completed. Risky Business refuses to consolidate their financial statements with a wholly owned subsidiary arguing that their operating results would be worse than what they already are if a consolidation were done. You meet with the partner and explain to her all of the changes that need to be recorded and how each of the many accounts are impacted. Solution: This would result in an adverse opinion. By not consolidated many amounts in the financial statements are impacted which renders the financial statements of no value – the impact of not consolidating is pervasive. As well, by not consolidating, the impact would be difficult to explain in the audit report (many changes to many numbers need to be explained). 10. The audit of the financial statements has been completed. Risky Business is a public company. The quality control reviewer has gone away for the weekend. The partner in charge is also going away on holiday and wants to sign off on the audit report before she leaves. She argues that the quality control reviewer will not mind if she dates the audit report today and have him review the file on Monday when he returns. Explain to the partner in charge the appropriate date of the audit report. Solution: The date of the audit report is determined once the financial statements have been approved by management/audit committee. The quality control review must be done before the date of the audit report. In this case, the partner in charge will have to wait until the quality control review has been completed and the financial statements have been approved by management....