Accounting and Auditing: Two Independent Situations
Below are two independent situations:
A. Grinner and Greeter, CPAs, were engaged to perform an audit of the financial statements of Happy, Inc. Happy's management would not allow Grinner and Greeter to confirm any of the accounts receivable. All other auditing procedures were performed as considered necessary by Grinner and Greeter and no problems were found. However, Grinner and Greeter were unable to satisfy themselves with regard to the balance in the accounts receivable.
B. Tick and Tie, CPAs, were performing their annual audit of Johnson Manufacturing Company. Johnson is currently being sued for $2,000,000 related to an alleged defective product that they sold to a customer. Johnson's legal counsel has told Tic and Tie that it is probable that Johnson will lose the suit and have to pay the entire $2,000,000. Johnson's management has included information in the footnotes about the lawsuit. However, they have not recorded any loss or liability in income statement or balance sheet.
Required:
For each of the independent situations presented above, state what type of opinion should be issued on the company's financial statements. Briefly explain your rationale. Finally, state which paragraphs, if any, of the standard report would be modified
A.
The auditors would issue a disclaimer of opinion. This happens when the auditor has no means to base the entire opinion, which is what happened above. The auditor has determined that the financial statements are in accordance with GAAP, but the auditor makes a disclaimer as to part of the audit because he or she was not able to test certain accounts due to being denied access to the accounts. The auditor has nothing to base their opinion on, for those accounts, and therefore issues a disclaimer of opinion, which removes liability from the auditor for those accounts and transactions related to those accounts. The scope paragraph would likely be modified to include the conditions present in A/R. The opinion paragraph would
A. Grinner and Greeter, CPAs, were engaged to perform an audit of the financial statements of Happy, Inc. Happy's management would not allow Grinner and Greeter to confirm any of the accounts receivable. All other auditing procedures were performed as considered necessary by Grinner and Greeter and no problems were found. However, Grinner and Greeter were unable to satisfy themselves with regard to the balance in the accounts receivable.
B. Tick and Tie, CPAs, were performing their annual audit of Johnson Manufacturing Company. Johnson is currently being sued for $2,000,000 related to an alleged defective product that they sold to a customer. Johnson's legal counsel has told Tic and Tie that it is probable that Johnson will lose the suit and have to pay the entire $2,000,000. Johnson's management has included information in the footnotes about the lawsuit. However, they have not recorded any loss or liability in income statement or balance sheet.
Required:
For each of the independent situations presented above, state what type of opinion should be issued on the company's financial statements. Briefly explain your rationale. Finally, state which paragraphs, if any, of the standard report would be modified
A.
The auditors would issue a disclaimer of opinion. This happens when the auditor has no means to base the entire opinion, which is what happened above. The auditor has determined that the financial statements are in accordance with GAAP, but the auditor makes a disclaimer as to part of the audit because he or she was not able to test certain accounts due to being denied access to the accounts. The auditor has nothing to base their opinion on, for those accounts, and therefore issues a disclaimer of opinion, which removes liability from the auditor for those accounts and transactions related to those accounts. The scope paragraph would likely be modified to include the conditions present in A/R. The opinion paragraph would