AUDITING AND ASSURANCE SERVICES

Ability to continue as a going concern.

2. Intelligis Electronics is a manufacturer of advanced electrical components. During the year, changes in the market resulted in a significant decrease in the demand for their products, which are now being sold significantly below cost. Management re-fuses to write off the products or to increase the reserve for obsolescence.

3. In the last 3 months of the current year, Oil Refining Company decided to change direction and go significantly into the oil drilling business. Management recognizes that this business is exceptionally risky and could jeopardize the success of its exist-ing refining business, but there are significant potential rewards. During the short period of operation in drilling, the company has had three dry wells and no successes. The facts are adequately disclosed in footnotes.

4. Your client, Harrison Automotive, has changed from straight-line to sum-of-the-years’ digits depreciation. The effect on this year’s income is immaterial, but the effect in future years may be highly material. The change is not disclosed in the footnotes.

5. Circumstances prevent you from being able to observe the counting of inventory at Brentwood Industries. The inventory amount is material in relation to Brentwood Industries’ financial statements. But, you were able to perform alternative procedures to support the existence and valuation of the inventory at year-end.

6. Approximately 20 percent of the audit of Lumberton Farms, Inc., was performed by a different CPA firm, selected by you. You have reviewed their audit files and believe they did an excellent job on their portion of the audit. Nevertheless, you are unwilling to take complete responsibility for their work.

For each situation, do the following:

  • a. Identify which of the conditions requiring a deviation from a standard unmodified opinion audit report is applicable, if any.
  • b. State the level of materiality as immaterial, material, or highly material. If you cannot de-cide the level of materiality, state the additional information needed to make a decision. ‘Based on AICPA question paper, American Institute of Certified Public Accountants.

The company has adequately disclosed the change in estimated useful lives of its buses and the effect of the change on 2019 income in a note to the financial statements. 6. E-Lotions.com, Inc., is an online retailer of body lotions and other bath and body supplies. The company records revenues at the time customer orders are placed on the website, rather than when the goods arc shipped, which is usually two days after the order is placed. The auditor determined that the amount of orders placed but not shipped as of the balance sheet date is not material.

For each situation, do the following:

a. Identify which of the conditions requiring a deviation from a standard unmodified opinion audit report is applicable, if any.

b. State the level of materiality as immaterial, material, or highly material. If you cannot de-cide the level of materiality, state the additional information needed to make a decision.

c. Given your answers in parts a. and b., state the appropriate audit report from the fol-lowing alternatives (if you have not decided on one level of materiality in part b., state the appropriate report for each alternative materiality level):

(1) Unmodified opinion-standard wording

(2) Unmodified opinion-explanatory paragraph

(3) Unmodified opinion-nonstandard report wording

(4) Qualified opinion-GAAP departure

(5) Qualified opinion-scope limitation

(6) Disclaimer

(7) Adverse* 3-26 (OBJECTIVES 3-4, 3-5, 3-6, 3-7, 3-

8) For the following independent situations, assume that you are the audit partner on the engagement:

  • 1. A number of frozen yogurt stores have opened in the last few years and your client, YogurtLand, has experienced a noticeable decline in customer traffic over the past several months that has caused you to have substantial doubt about YogurtLand’s ability to continue as a going concern.
  • 2. Intelligis Electronics is a manufacturer of advanced electrical components. During the year, changes in the market resulted in a significant decrease in the demand for their products, which are now being sold significantly below cost. Management re-fuses to write off the products or to increase the reserve for obsolescence.
  • 3. In the last 3 months of the current year, Oil Refining Company decided to change direction and go significantly into the oil drilling business. Management recognizes that this business is exceptionally, risky and could jeopardize the success of its exist-

 

b. Explain the deficiencies in Patel’s report as drafted.’ 3-25 (OBJECTIVES 3-4, 3-5, 3-6. 3-7, 3-8) The following are independent situations for which you wi 11 recommend an appropriate audit report:

1. Subsequent to the date of the financial statements as part of his post-balance sheet date audit procedures, a CPA learned that a recent fire caused heavy damage to one of a client’s two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail. The financial statements and footnotes as prepared by the client did not disclose the loss caused by the fire.

2. During the course of his audit of the financial statements of a corporation for the purpose of expressing an opinion on the statements, a CPA is refused permission to inspect the minutes of board of directors’ meetings that document significant deci-sions of the board. The corporation secretary instead offers to give the CPA a certified copy of all resolutions and actions involving accounting matters.

3. A CPA is engaged in the audit of the financial statements of a large manufacturing company with branch offices in many widely separated cities. The CPA was not able to count the substantial undeposited cash receipts at the close of business on the last day of the fiscal year at all branch offices. As an alternative to this auditing procedure used to verify the accurate cutoff of cash re-ceipts, the CPA observed that deposits in transit as shown on the year-end bank reconcili-ation appeared as credits on the bank statement on the first business day of the new year. He was satisfied as to the cutoff of cash receipts by the use of the alternative procedure.

4. On January 2, 2020, the Retail Auto Parts Company received a notice from its primary supplier that effective immediately, all wholesale prices will be increased by 10 percent. On the basis of the notice, Retail Auto Parts revalued its December 31, 2019, inventory to reflect the higher costs. The inventory constituted a material proportion of total as-sets; however, the effect of the revaluation was material to current assets but not to total assets or net income. The increase in valuation is adequately disclosed in the footnotes.

5. A CPA has completed her audit of the financial statements of a bus company for the year ended December 31, 2019. Prior to 2019, the company depreciated its buses over a 10-year period. During 2019, the company determined that a more realistic esti-mated life for its buses was 12 years and computed the 2019 depreciation on the basis of the revised estimate. The CPA has satisfied herself that the 12-year life is reasonable.

 

c. Given your answers in parts a. and b., state the appropriate audit report from the fol-lowing alternatives (if you have not decided on one level of materiality in part b., state the appropriate report for each alternative materiality level):

  • (1) Unmodified opinion—standard wording
  • (2) Unmodified opinion—explanatory paragraph
  • (3) Unmodified opinion—nonstandard report wording
  • (4) Qualified opinion only—GAAP departure
  • (5) Qualified opinion—scope limitation (
  • 6) Disclaimer
  • (7) Adverse

3-27 (OBJECTIVES 3-3)

PCAOB Rule 3211, Auditor Reporting of Certain Audit Participants, requires that an audit firm file a form, referred to as Form AP, for each initial issuance of an audit report. On Form AP, the audit firm discloses the name of each audit engagement partner who participated in the audit, as well as the names and locations of any other audit firms participating in 5 percent or more of the audit engagement.

The total number of audit firms participating in less than 5 percent of the audit engagement, as well as the overall percentage of audit hours contributed by these firms, are also required to be disclosed. Access the text-book website to obtain the file “PCAOB Form AP Data” that includes data obtained from the PCAOB’s AuditorSearchSM database and the related data dictionary. Sort the dataset by fiscal period date to obtain the subset of Form AP filings for audits of financial statements that had a fiscal year end anytime during 2017 to complete the following:

  • a. How many Form APs relate to 2017 audits?
  • b. What is the name of the individual who served as the engagement partner for Nordstrom Inc.? What other engagement(s) did that individual also serve as engagement partner?
  • c. Which global audit firm had the highest number of Form AP filings for 2017 audits (Note: Some of the global firms have more than one firm ID number)? How many Form APs were filed by that firm on a global basis? How many of those Form APs relate to the U.S.-based practice of that firm?
  • d. For which firm did Joseph D’Introno work in 2017? How many AP forms were filed for him for 2017 audits? What type of public company audit clients did he mostly serve in 2017?
  • e. How many Fnrrn A Pc rPlAtP to psrtnerc in the, Atlanta Office of Ernst & Young, LLP