ACC410 Auditing

AUDIT REPORT MODIFICATIONS 2 Audit Report Modifications Audit report modifications are used when the auditors encounter a scope limitation, a deviation from generally accepted accounting principles, a problem with the application of methods, or deficient financial statement disclosures. Whenever the auditor expresses an opinion that is other than unqualified, a clear description of all the substantive reasons should be included in the report and unless impracticable, a quantification of the possible effects on the financial statements. Items 1 through 6 present various independent factual situations an auditor might encounter in conducting an audit. For each situation assume: • The auditor is independent. • The auditor previously expressed an unqualified opinion on the prior year’s financial statements. • Only single-year (not comparative) statements are presented for the current year. • The conditions for an unqualified opinion exist unless contradicted in the factual situations. • The conditions stated in the factual situations are material. • No report modifications are to be made except in response to the factual situation. Using the list of Types of Opinions and Report Modifications provided for this assignment, the type of opinion and modifications an auditor would normally select are shown following each situation. 1. In auditing the long-term investments account, an auditor is unable to obtain audited financial statements for an investee located in a foreign country. The auditor concludes that sufficient appropriate audit evidence regarding this investment cannot be obtained. F. Either a disclaimer of opinion or an "except for" qualified opinion. L. Describe the circumstances in an explanatory paragraph preceding the opinion paragraph, and modify the scope and opinion paragraphs. This is a scope limitation because the auditor is unable to obtain audited financial AUDIT REPORT MODIFICATIONS 3 statements for an investee, and therefore requires either a qualified opinion or a disclaimer of opinion depending on assessment of the importance of the scope limitation. 2. Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. However, the financial statement disclosures concerning these matters are adequate. B. An unqualified opinion. I. Describe the circumstances in an explanatory paragraph following the opinion paragraph without modifying the three standard paragraphs. Substantial doubt about an entity's ability to continue as a going concern requires either an unqualified opinion with an explanatory paragraph, or a disclaimer. When an unqualified opinion is expressed, the appropriate modification of the report is an explanatory paragraph following the opinion paragraph. 3. A principal auditor decides to take responsibility for the work of another CPA who audited a wholly owned subsidiary of the entity and issued an unqualified opinion. The total assets and revenues of the subsidiary represent 17 percent and 18 percent, respectively, for the total assets and revenues of the entity being audited. B. An unqualified opinion. O. Describe the circumstances within the opinion paragraph without adding an explanatory paragraph. A standard unqualified opinion is appropriate because the principal auditor decided to take responsibility for the work of another CPA. 4. An entity issues financial statements that present financial position and results of operations but omits the related statement of cash flows. Management discloses in the notes to the financial statements that it does not believe that statement of cash flows to be a useful financial statement. A. An "except for" qualified opinion. J. Describe the circumstances in an explanatory paragraph preceding the opinion paragraph, and modify the opinion paragraph. AUDIT REPORT MODIFICATIONS 4 Because the entity issued financial statements that present financial position and results of operations, but omitted the related statement of cash flows, the auditor would express a qualified opinion due to the departure from generally accepted accounting principles. 5. An entity changes its depreciation method for production equipment from straight-line to a units-of-production method based on hours of utilization. The auditor concurs with the change, although it has a material effect on the comparability of the entity’s financial statements. B. An unqualified opinion. I. Describe the circumstances in an explanatory paragraph following the opinion paragraph without modifying the three standard paragraphs. Because the auditor concurs with the change in accounting principles, and the change has a material effect on comparability of financial statements, an unqualified opinion with an explanatory paragraph following the opinion paragraph, with no modification of the three standard paragraphs would be expressed. 6. An entity discloses certain lease obligations in the notes to the financial statements. The auditor believes that the failure to capitalize these leases is a departure from generally accepted accounting principles. E. Either an "except for" qualified opinion or an adverse opinion. J. Describe the circumstances in an explanatory paragraph preceding the opinion paragraph, and modify the opinion paragraph. The auditor would assess the materiality of the departure from generally accepted accounting principles to determine whether to express a qualified opinion or an adverse opinion. Regardless of whether a qualified opinion or an adverse opinion is issued, the circumstances would be described in an explanatory paragraph preceding the opinion paragraph, and modifications would be made to the opinion paragraph. AUDIT REPORT MODIFICATIONS 5 References Whittington, O.R. & Pany, K. (2010). Principles of auditing and other assurance services (17th ed.). Boston, MA: McGraw- Hill.