Question

3-27 (Objectives 3-4, 3-5, 3-6, 3-7, 3-8) The following are independent situations for which you will 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 the board of director meetings that document significant decisions of the board. The corporation secretary instead offers to give the CPA a certi - fied 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 receipts, the CPA 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 procedure. 4. On January 2, 2017, the Retail Auto Parts Company received a notice from its primary supplier that effective immediately, all wholesale prices will be increased 10%. On the basis of the notice, Retail Auto Parts revalued its December 31, 2016, inventory to reflect the higher costs. The inventory constituted a material proportion of total assets; how - ever, 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

Answer 1

Audit reports may vary depending on specific situations, such as undisclosed losses, scope limitations, satisfactory alternative audit procedures, or proper footnote disclosures.

Step-by-step explanation:

Based on the provided situations, several types of audit reports may be recommended:

1. For the client with the undisclosed loss from a fire, an adverse or qualified audit report should be issued due to the lack of disclosure, which constitutes a departure from GAAP.
2. When a CPA is refused permission to inspect board minutes and is provided with a certified copy of resolutions instead, a qualified or disclaimer of opinion report may be necessary due to the scope limitation.
3. If the CPA is satisfied with alternative procedures that provide assurance about the cutoff of cash receipts, then an unmodified opinion may be appropriate as the alternative procedure adequately verifies the financial information.
4. For the Retail Auto Parts Company that revalued its inventory based on an increase in wholesale prices, as long as the increase is adequately disclosed in the footnotes and does not materially affect the total assets or net income, an unmodified opinion may again be suitable.

The comptroller's constitutional requirements for submitting revenue estimates and certifying appropriations bills within available revenues highlight the importance of transparency and adherence to regulations in fiscal matters.

Answer 2

In the provided scenarios, the recommended audit reports vary from unmodified opinion to qualified, adverse, or disclaimer of opinion, depending on issues such as omission of material events, scope limitation, or the sufficiency of audit evidence.

Step-by-step explanation:

Appropriate Audit Reports for Independent Situations

For the situation involving the fire damage to the client's plant that was not disclosed in the financial statements or footnotes, the appropriate audit report would be a qualified opinion or an adverse opinion, depending on the materiality of the information omitted. A qualified opinion indicates that, except for the effects of the issue noted, the financial statements present a true and fair view. If the issue is materially misstated, an adverse opinion is needed because the financial statements do not present a true and fair view.

In the scenario where the auditor is refused permission to inspect the minutes of board meetings, this limitation of scope would require the auditor to issue either a qualified opinion or a disclaimer of opinion, again depending on the potential impact of this limitation on the ability to form an opinion on the financial statements.

For the situation where cash receipts could not be counted but were verified through an alternative auditing procedure that the CPA found satisfactory, the audit report can be unmodified as the auditor was able to gather sufficient appropriate audit evidence about the cutoff of cash receipts.

In the final case of the Retail Auto Parts Company's inventory revaluation due to a price increase by their supplier, if the revaluation is material but does not distort the view provided by the financial statements and is adequately disclosed, the auditor may issue an unmodified opinion with an emphasis of matter paragraph highlighting the footnote disclosure.