Chapter 17 - Solution Manual Copy

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Chapter 17 - Auditors’ Reports CHAPTER 17 Auditors' Reports Review Questions 17-1 The sectio sections ns of of the standard standard audit audit report report for a nonpubl nonpublic ic compa company ny are: are: (1) introd introducto uctory ry sectio section n (which does not hae a section title)! (") mana#ement’s responsibility for the financial statements! ($) auditor’s responsibility! and (%) opinion& 17-" The function function of notes notes to to financial financial statement statementss is to to proide proide ade'uate disclosure disclosure when when information information in the financial statements is insufficient to attain this obectie& 17-$ The primary differences are that the CA*+ report ($ re'uired): ,ncludes the words Re#istered in the title& References standards of the CA*+ rather than #enerally accepted auditin# standards& ,ncludes less detailed discussions of mana#ement and auditor responsibilities& ,ncludes an additional para#raph indicatin# that the auditors hae also issued a report on the client.s internal control oer financial reportin#& /oes not include section titles& • • • • • 17-% /isa#ree /isa#ree&& 0hile 0hile AA AA is a fre'ue fre'uentl ntly y used used financ financial ial report reportin# in# framewo framewor2! r2! AA3 AA3 is a set of of auditin# standards! not a financial reportin# framewor2& 17-1 Chapter 17 - Auditors’ Reports 17-4 The typ types of unmodified and modified opinions include: (1) (1) (") ($) ($) (%) (4) (8) (7) 5nmodified op opinion 6st 6stan and dard ard& 5nmo 5nmodi difi fied ed opin opinio ion n with with an emph emphasi asiss of of matte matterr para# para#raph raph&& 5nmo 5nmodi difi fied ed opin opinio ion n wit with h an othe otherr mat matte terr para# para#rap raph& h& 5nmo 5nmodif dified ied opinio opinion n with with dii diide ded d respons responsibi ibilit lity y on on #roup #roup financi financial al statem statements ents&& ualified opinion& Aderse opinion& /isclaimer of of op opinion& 17-8 The report report should should be dated dated as of the date reen reen obtained obtained ssuffic ufficient ient appropriate audit audit eiden eidence ce to support the opinion! 9ebruary "& (The financial statements and the reiew of the audit both must  be complete completed&) d&) 17-7 ;o& Referen Reference ce to a compon component ent auditor auditor in in a #roup #roup audit audit report! report! in itself! itself! does does not represen representt a 'ualification& Rather! this form of opinion merely diides diides the auditors. oerall responsibility for the en#a#ement between two or more CA firms& ;ote! howeer! that factors other than the diision of  responsibility may lead to a 'ualified report (i&e&! departures from AA and scope limitations)& 17-< The wordin# wordin# of a report report with an unmodifi unmodified ed opinion opinion mi#ht mi#ht depart depart from the wordin# wordin# of the the standard standard report when 3ubstantial doubt about an entity’s ability to continue as a #oin# concern e=ists& rinciples of accountin# hae not been consistently applied in relation to the prior year& The auditors wish to emphasi>e some matter in the financial statements (e&#&! si#nificant related party transactions! si#nificant eents! uncertainties)& A #roup auditor ma2es reference to a component auditor& (only three re'uired) • • • • 17-? The audit audit report should include include an emphasis emphasis of matter matter section section that describes describes the chan#e and ma2es ma2es reference to the financial statement note e=plainin# the nature of and ustification for the chan#e in the method of aluin# the inentories and the effect of such chan#e upon the financial statements& 17-1 The two circumstan circumstances ces resultin# resultin# in mod modified ified opinions opinions are (a) materially materially misstated misstated financial financial statements (a @departure from AA) and (b) inability to obtain sufficient appropriate audit eidence (a @scope limitation)& 17-11 The statement statement is incorrect& incorrect& ,f the misstatem misstatement ent is immaterial! immaterial! an unmodifi unmodified ed opinion opinion may be issued& ,f it is material! the auditors issue either a 'ualified opinion or an aderse opinion dependin# upon whether they beliee the misstatement is perasie& 17-" Chapter 17 - Auditors’ Reports 17-1" Bffects of misstatements become perasie when! in the auditor’s ud#ment! they meet one or more of the followin# three criteria: They are not confined to specific elements! accounts! or items of the financial statements ,f confined! they represent or could represent a substantial proportion of the financial statements or  ,n relation to disclosures! they are fundamental to users’ understandin# of the financial statements& • • • 17-1$ A client can aoid an opinion 'ualified because of inade'uate disclosure merely by ma2in# the appropriate disclosure in the financial statements& 17-1% ,n such a circumstance a +asis for ualified *pinion section is added to the report and the opinion  para#raph is modified& 17-14 3ince the auditors hae not been able to form an opinion on the financial statements ta2en as a whole! they must disclaim an opinion& Doweer! they should set forth their reserations about the accountin# treatment of the deferred income ta=es in an e=planatory para#raph to their disclaimer& 17-18 *rdinarily! aderse opinions do the client no #ood& resumably! creditors and stoc2holders would not proide debt or e'uity capital and! if the client is under 3BC urisdiction! the 3BC mi#ht launch an inesti#ation of mana#ement for iolations of the federal securities acts& Thus! the client usually will ma2e whateer chan#es in the financial statements that the auditors re'uire in order to aoid receiin# an aderse opinion& ,n fact! in the few cases in which the client and its auditors cannot a#ree! the client would probably dischar#e the auditors instead of hain# them complete an audit that culminates in an aderse opinion& 17-17 The statement is not correct& A basis for modification para#raph is of three possible types: (1)  basis for 'ualified opinion para#raph! (") basis for aderse opinion para#raph! and ($) basis for disclaimer of opinion para#raph& 0hile AA3 (and international standards) refer to a basis for modification para#raph! that term is not used in an audit report6one of the three more descriptie terms is used when an audit opinion is modified& 17-1< Ees& Bach year’s financial statements stand alone& Thus! the CAs may issue different types of opinions on the financial statements of successie years when reportin# on comparatie statements& 17-1? Ees& 0hen reportin# on comparatie statements! CAs should update their report on the prior year.s statements to determine whether it is still the proper type of report to accompany those statements& 9or e=ample! a departure from AA that e=isted last year! resultin# in a report 'ualification! mi#ht hae been corrected& ,n this case! it is appropriate for the auditors to reise their report on the prior year.s statements to a standard un'ualified report& 17-$ Chapter 17 - Auditors’ Reports 17-" The reports containin# audited financial statements filed by a company subect to the reportin# re'uirements of the 3BC may include:  Forms S-l  throu#h S-11& These are the re#istration statements for clients plannin# to issue securities to the public they are accompanied by comparatie audited financial statements&  Forms SB-1 and SB-2. These forms are more simplified re#istration forms for small businesses&  Form 8-K & A report filed upon the occurrence of a specified si#nificant eent& ,f the eent is a si#nificant ac'uisition or disposal of assets!  Form 8-K  will be accompanied with pro forma financial information& An <-F report is used to report a chan#e in auditors&  Form 10-Q. This form includes 'uarterly financial statements reiewed by the company’s auditors&  Form 10-K & This report is filed annually by publicly owned companies and includes audited financial statements! reports on internal control oer financial reportin#! and other detailed financial information& Questions Requiring Analysis 17-"1 (") ($) (b) (") ($) (%) (a) (1) The first sentence of the statement is partially true& ,t is important to read the notes to financial statements because they proide important supplementary information& ;otes often pertain to comple= matters and are presented in technical lan#ua#e& Certainly it must be ac2nowled#ed that sometimes they could be presented in a clearer form& To the e=tent the notes supplement disclosures in the body of the financial statements! they could reduce the auditors. e=posure to third-party liability& The disclosure must be supplementary! not contradictory& (1) The second statement is wron# in assertin# that the notes can be used to correct or contradict financial statement presentation& ;otes are an inte#ral part of the financial statements& ,f there is contradiction or if the presentation is incomprehensible! this constitutes inade'uate reportin# and re'uires 'ualification of the audit report& The statement fails to reco#ni>e that while there is a need for accuracy and completeness! those notes should also be comprehensible& The statement incorrectly assi#ns mana#ement.s primary responsibility for the financial statements and notes to the auditors& The auditors. relationship to the notes is the same as their relationship to the balance sheet and other financial statements their actions are #oerned by the same reportin# responsibilities and liabilities to interested parties& +ecause notes are prepared by mana#ement! the auditors cannot control their content& *ther adisers! e&#&! le#al counsel! will influence the wordin# of notes& The auditors properly should recommend improements in presentation! but they will modify their report’s opinion only if disclosure is inade'uate or so unclear as to be misleadin#& 17-%