Case Study 3-29 Audit Report

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3-29Audit Report (Case Study 3-29)
For each situation, do the following;
a) Identify which of the conditions requiring a deviation from or modification of an unqualified standard report is applicable. b) State the level of materiality as immaterial, material or highly material. If you cannot decide 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 following alternatives (if you have not decided in one level of materiality in part (b), state the appropriate report for each alternative materiality level): 1) Unqualified-standard wording

2) Unqualified-explanatory paragraph
3) Unqualified-modified wording
4) Qualified opinion only-except for
5) Qualified scope and opinion
6) Disclaimer
7) Adverse

Situation 1
Subsequent to the date of the financial statements as part of his post-balance sheet date audit procedures, a CA learned that a recent fire caused heavy damage to one of the client’s two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail. The financial statements and appended notes as prepared by the client did not disclose the loss caused by the fire. a) “The financial statements and appended notes as prepared by the client did not disclose the lost caused by the fire.” this accounting treatment fails to comply with the General Accepted Accounting Principle (GAAP). b) The level of materiality of the loss depends on the auditor’s preliminary materiality level it could be either highly or material only. c) There are two types of reports can be issued which solely depends on the materiality level whether is high or material only. * Highly material; the auditor is require to issue an adverse(7) opinion. Adverse opinion is used only when the auditor believes that the overall financial statements are so materially misstated causes by the loss caused by fire accident that do not present fairly the financial position in accordance of approved accounting standards (GAAP). The adverse opinion can be issue as the auditor has conduct further investigation by studying various of resources e.g. newspaper. Modification of the Audited Report (Adverse) * Same as the introductory paragraph as standard unqualified report * Scope paragraph will also remain the same * Opinion paragraph; do not give a true and fair view of the financial positions. |

* Material; the auditor should issue a qualified opinion only-except for(4). If the auditor set a higher level of predefined materiality level, the impact of the loss of the damage caused by the fire will not impacted the overall financial reporting so the specific aspect can be added with the term “except for”. In this case the term “except for” is to highlight the failure of the company in recognizes and disclose as footnotes the loss incurred caused by fire as required by GAAP. Modification of the Audited Report (Qualified Opinion Only-Except For) * Same as the introductory paragraph as standard unqualified report * Qualifying paragraph will be added to describe the auditor limitations in giving opinion * Opinion added with “except for” to highlight the specific aspect|

Situation 2
A CA is engaged in the audit of the financial statements of a large manufacturing company with branch offices in many widely separated cities. The CA 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 cash receipts, the CA observed that deposits in transit as shown on the year-end bank reconciliation 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...
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