3-30 (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

3-30 (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 appended notes as prepared

by the client did not disclose the loss caused by the fire.

2. E-Lotions.com, Inc. is an online retailer of body lotions and other bath and body

supplies. The company records revenues at the time customer orders are placed on

the Web site, rather than when the goods are shipped, which is usually 2 days after

the order is placed. The auditor determined that the amount of orders placed but not

shipped as of the balance sheet date is not material.

3. For the past 5 years a CPA has audited the financial statements of a manufacturing

company. During this period, the audit scope was limited by the client as to the observation

of the annual physical inventory. Because the CPA considered the inventories

to be material and he was not able to satisfy himself by other auditing procedures, he

was unable to express an unqualified opinion on the financial statements in each of

the 5 years.The CPA was allowed to observe physical inventories for the current year ended

December 31, 2009, because the client’s banker would no longer accept the audit

reports. However, to minimize audit fees, the client requested that the CPA not

extend his audit procedures to the inventory as of the beginning of the year,

January 1, 2009.

4. 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 minute books containing the significant decisions from the board of

directors meetings. The corporation secretary instead offers to give the CPA a certified

copy of all resolutions and actions involving accounting matters.

5. 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.6. On January 2, 2010, 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, 2009, inventory to

reflect the higher costs. The inventory constituted a material proportion of total

assets; however, 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


7. A CPA has completed her audit of the financial statements of a bus company for the

year ended December 31, 2009. Prior to 2009, the company depreciated its buses

over a 10-year period. During 2009, the company determined that a more realistic

estimated life for its buses was 12 years and computed the 2009 depreciation on the

basis of the revised estimate. The CPA has satisfied herself that the 12-year life is reasonable.

The company has adequately disclosed the change in estimated useful lives of its

buses and the effect of the change on 2009 income in a note to the financial statements.

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


c. Given your answers in parts a and b, state the appropriate audit report from the following

alternatives (if you have not decided on 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

(5) Qualified scope and opinion

(6) Disclaimer

(7) Adverse*

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