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Unformatted text preview: Chapter 18 - Reports on Audited Financial Statements 18-1 CHAPTER 18 REPORTS ON AUDITED FINANCIAL STATEMENTS Answers to Multiple-Choice Questions 18-10 b 18-16 c 18-11 c 18-17 b 18-12 a 18-18 b 18-13 a 18-19 b 18-14 a 18-20 c 18-15 a 18-21 c Solutions to Problems 18-22 a. The auditor would issue an unqualified audit report with modified wording for the reliance on the other auditors. In this case, the principal auditor does not intend to take responsibility for the other auditor's work. b. The auditor should issue a qualified audit report because management has not complied with GAAP. The auditor is not required to prepare the statement of cash flows for disclosure in the audit report. c. This approach is not in accordance with GAAP because such contingencies must be disclosed in the notes to the financial statements if the amount of the contingency cannot be reasonably estimated. A departure from GAAP such as this one requires either a qualified or an adverse opinion, depending on the materiality of the item in question. In this case the potential settlement is likely to be very large given the proportions of the tragedy in terms of human loss and suffering. In addition, the tragedy may well threaten the companys ability to be involved in similar projects in the future and perhaps its own survival. Thus, an adverse opinion is very likely the most appropriate response. d. Because the client wouldnt allow the confirmations to be sent, the appropriate response would generally be either a qualified opinion or a disclaimer of opinion for a scope limitation imposed by the clients management, depending on the materiality of accounts receivable. However, even if accounts receivable isnt highly material, if the auditor suspects fraud by upper management, the scope limitation would merit a disclaimer. e. Since the auditor is satisfied about the inventory balance using alternative audit procedures, a standard unqualified audit report can be issued. The alternative audit procedures would normally include a physical count subsequent to year end and reconciliation to the balance at the end of the reporting period. f. Since the client fails to disclose the related-party transaction, the auditor should issue a qualified or adverse audit report depending on the materiality of the matter. The Chapter 18 - Reports on Audited Financial Statements 18-2 clients failure to disclose means that the financial statements do not comply with GAAP. g. Recall that the instructions to the problem indicate the assumption that all matters listed are significant. Since the change in accounting principle is properly accounted for, the auditor should issue an unqualified audit report with an explanatory paragraph for a lack of consistency in the application of GAAP....
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This note was uploaded on 10/16/2011 for the course AIM 6334 taught by Professor Chrits during the Spring '11 term at University of Texas at Austin.
- Spring '11