When the client has not followed generally accepted

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Unformatted text preview: lified report. Reports involving other auditors. When an auditor relies upon a different CPA firm to perform part of the audit, the auditor can indicate that responsibility for the audit is shared with another CPA firm by modifying the wording of an unqualified report. An audit report prepared by Garrett and Brown, CPAs, is provided below. The audit for the year ended December 31, 2007 was completed on March 1, 2008, and the report was issued to Javlin Corporation, a private company, on March 13, 2008. List any deficiencies in this report. Do not rewrite the report. We have examined the accompanying financial statements of Dalton Corporation as of December 31, 2007. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these statements based on our audit. We conducted our audit in accordance with generally accepted accounting principles. Those principles require that we plan and perform the audit to provide reasonable assurance about whether the financial statements are free of misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. We believe that our audit provides a reasonable basis for our opinion. In our opinion, except for the effects of not capitalizing certain lease obligations that should be capitalized in order to conform with generally accepted accounting principles, the financial statements referred to above present accurately the financial position of Jacob Corporation as of December 31, 2007, in conformity with accounting principles generally accepted in the 1-146 United States of America. Garrett and Brown, CPAs March, 2008 Answer: The audit report contains the following deficiencies: • The report title is missing. • The report is not addressed to anyone and should be addressed to shareholders or the board of directors. • The introductory paragraph should refer to an “audit,” not an “examination.” • The introductory paragraph should list the financial statements that were audited. • The introductory paragraph refers to the wrong company. • The scope paragraph should state the audit was conducted in accordance with auditing standards generally accepted in the United States of America, not generally accepted accounting principles. • “Those principles …” should read “Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements.” • The scope paragraph should contain the following phrase: “An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.” • • • • • 90. medium Following the scope paragraph, there should be an explanatory paragraph that discusses the GAAP violation related to the failure to capitalize certain lease obligations. In the opinion paragraph, the auditor should state that the financial statements present fairly…, not present accurately… In the opinion paragraph, the phrase “…in all material respects…” should be included. In the opinion paragraph, the phrase “…and the results of its operations and its cash flows for the year then ended…” should be included. The audit report should be dated March 13, 2008. Discuss the differences regarding how matters affecting consistency and matters affecting comparability are referred to in the audit report. Provide two examples of each type of change. Answer: The auditor should disclose a material lack of consistent application of GAAP by adding an explanatory paragraph after the unqualified opinion paragraph. The explanatory paragraph should discuss the nature of the change and should refer to the footnote in the financial statements that discusses the change. Changes that affect comparability, but not consistency, require no such explanatory paragraph in the audit report, assuming the change is disclosed in the footnotes. Examples of changes affecting consistency include changes in accounting principles, changes in reporting entities, and correction of errors involving accounting principles. Examples of changes affecting comparability include changes in an estimate, error corrections not involving accounting principles, 1-147 variations in the format and presentation of financial information, and changes because of substantially different transactions or events. 1-148 91. (Public) medium The following is a portion of an adverse audit report issued for a public company. (Note: A separate report was issued on the effectiveness of internal control over financial reporting.) Independent Auditor’s Report To the shareholders of Wallace Corporation We have audited the accompanying balance sheet of Wallace Corporation as of December 31, 2007, and the related statements of income, retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the company’s management. Our responsibility is to ex...
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This note was uploaded on 02/04/2014 for the course ACCOUNTING 211 taught by Professor Alikapur during the Fall '13 term at American University of Sharjah.

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