Introductory paragraph scope paragraph and opinion

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Unformatted text preview: n rather than a condition beyond the client’s control causing the limitation, and because the limitation is highly material, a disclaimer is appropriate. Introductory paragraph is modified, second paragraph is added describing the scope restriction, scope paragraph is omitted, and opinion paragraph is a disclaimer of opinion. 2. None Not applicable (1) Unqualified— standard wording There is no indication questioning the ability of the business to continue operations. The auditor does not automatically add an explanatory paragraph simply because there is a risky business. 3. None Immaterial (1) Unqualified— standard wording The amount is immaterial. The facts are adequately disclosed in the footnote. 4. Failure to follow GAAP Material (4) Qualified opinion only —except for The standards require the use of a qualified opinion for the failure to include a statement of cash flows. Third paragraph must be added stating the omission. 5. Substantial doubt about going concern Material (2) Unqualified— explanatory paragraph There is a question about the ability of the company to continue as a going concern. The auditor therefore must issue an unqualified report with an explanatory paragraph following the opinion. 3-29 (continued) (a) CONDITION 6. Report involving other auditors (b) MATERIALIT Y LEVEL Material (c) TYPE OF REPORT (3) Unqualified— modified wording (d) MODIFIED WORDING / ADDITIONAL PARAGRAPHS (& OTHER COMMENTS) This is a shared audit report in which the auditor will identify the portion of work done by the other auditor in the introductory paragraph and still issue an unqualified opinion. The absolute dollar amounts of assets and revenues or percentages must be stated in the introductory paragraph. Introductory paragraph, scope paragraph, and opinion paragraph are all modified. 3-30 (a) (b) MATERIALITY (c ) TYPE OF 9-40 COMMENT CONDITION LEVEL REPORT 1. Failure to follow GAAP. Highly material or material, depending upon the amount of the loss and the auditor's preliminary judgment about materiality (7) Adverse (if highly material) or (4) Qualified opinion only — except for (if material) Disclosure of this information is required in a footnote. Failure to do so is a violation of GAAP and is likely to result in a qualified opinion, or it could be so material that it requires an adverse opinion. 2. Failure to follow GAAP. Immaterial (1) Unqualified— standard wording The amount is immaterial. 3. Scope of the audit has been restricted. Highly material or material, depending upon the auditor’s preliminary judgment about materiality. (6) Disclaimer (if highly material) or (5) Qualified scope and opinion (if material) Because the auditor was unable to satisfy himself about beginning inventories, it would be necessary to issue either a qualified or disclaimer of opinion on the income statement and statement of cash flows as well as the beginning balance sheet. The use of a qualified or disclaimer would depend upon materiality. An unqualified opinion could be issued for the current period balance sheet. 9-41 3-30 (continued) (a) CONDITION (b) MATERIALITY LEVEL (c ) TYPE OF REPORT COMMENT 4. Scope of the audit has been restricted. Highly material (6) Disclaimer Failure of the client to allow the auditor to inspect the minutes book would be a material client-imposed restriction. Due to the importance of the minutes book, a disclaimer would be necessary. The certified copy of all resolutions and actions would not be a satisfactory alternative procedure. 5. Scope of the audit has been restricted. Not applicable (1) Unqualified— standard wording Because the auditor was able to obtain alternative evidence, no scope qualification is necessary. If there were such a qualification, it would be a qualified scope and opinion or a disclaimer, depending on materiality. 6. Failure to follow GAAP. Material (4) Qualified opinion only— except for Retail Auto Parts has used a replacement cost inventory rather than lower of cost or market. It is not sufficiently material to require an adverse opinion. 7. None Not applicable (1) Unqualified— standard wording The change of estimated life is a change of condition and not a change in accounting principles. Therefore, an unqualified opinion is appropriate since there is adequate disclosure. 9-42 3-31 ITEM NO. TYPE OF CHANGE SHOULD AUDITOR'S REPORT BE MODIFIED? 1 An error correction not involving an accounting principle. No 2 An accounting change involving a correction of an error in principle, which is accounted for as a correction of an error. Yes 3 An accounting change involving a change in the reporting entity, which is a special type of change in accounting principles. Yes 4 An accounting change involving both a change in accounting principle and a change in accounting estimate. Although the effect of the change in each may be inseparable and the accounting for such a change is the same as that for a change in estimate only, an accounting principle is involved. Yes 5 An accounting change involving a change from one ge...
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