June 24, 2012
Standards Based Decision Making
Green and Associates is the CPA firm retained by the ABC Corporation to handle their external auditing duties. The auditing team at Green and Associates took time to review aspects of ABC’s finances and had some questions regarding their client’s monthly statements that made them a little uneasy. Items such as their inventory valuation methods not to mention, Green’s new client will not submit to an audit of internal financial controls. With all of the issues that Green and Associates are encountering the four types of auditor’s opinions, if their inventory valuation methods are legal and supported by GAAP, and if ABC’s refusal to permit an internal controls audit is within federal law need to be investigated. Lastly, an opinion must be written to address the situation and detail the ethical problems involved for both ABC and Green and Associates. The four types of opinions auditors use to quantify a statement of opinion regarding a completed financial audit are; unqualified, unqualified with an explanatory paragraph, qualified, and adverse. An unqualified opinion is the most desired from an auditor because it means an auditor regards the financial statements as being “clean”, and they fairly represent the financial condition of a company. Auditors must plan for audits and examine materials which give an auditor sufficient information for understanding and knowledge of a company to perform tests of information within financial statements to determine materiality, adherence to GAAP. An example of an unqualified audit is: To the Board of Directors and Shareholders
We have audited the accompanying balance sheets and the related statements of income, retained earnings, and cash flows of AAA Company as of December 31, XXXX, and XXXX. The company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits. Our audits conducted in accordance with auditing standards generally accepted in the United States of America. Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly and materially the financial position of AAA Company as of December 31, XXXX and XXXX, the results of its operations and cash flows conform to accounting principles generally accepted in the United States of America. Signature
Unqualified audits that contain an explanatory paragraph are given when an auditor thinks there is a matter that deems mention in the audit because an issue in the company statements needs to be addressed by the management, board of directors, and auditing committee. In this case the auditor is giving the company notification of a something that should be addressed. An example of an explanatory paragraph in an unqualified opinion is as follows: As noted in note 1, the company has changed valuation of inventory from first in first out (FIFO) to last in first out (LIFO). Management’s plans in regard to this change are included in note 1. The financial statements do not include adjustments that may be a result of this change. A qualified opinion is given when the auditor questions applications of accounting principles in financial statements and an outcome of materiality is not able to be established. An illustration of a qualified opinion follows: The Company has...