Use the accompanying solution sheet to reply to the eight situations below that relate to the audit of financial statements of nonpublic companies....
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1. After completing a financial statement audit, the auditor needs to assess the situation to determine the proper type of report to issue. Expressing an independent opinion on the fairness of financial statements is an attestation service most frequently provided by auditors. The opinion is expressed in the auditors' report. Audit reports can be unmodified or modified. A report with an unmodified opinion may be a "standard report" or can include an emphasis-of-matter paragraph. A modified report can have an extra explanatory paragraph in connection with a qualified opinion, adverse opinion, or disclaimer of opinion.


Match each situation with the appropriate type of opinion to be issued


1. Adverse Opinion


2. Unqualified Opinion with an emphasis-of-Mater Paragraph


3. Unmodified Opinion


4. Adverse Opinion


5. Disclaimer of Opinion


A. Auditors have obtained sufficiently appropriate evidence to conclude that the financial statements are not materially misstated


B. Auditors have doubt about a company's ability to continue as a going concern


C. The client has elected to not follow GAAP


D. A material misstatement is considered pervasive


E. Auditors determine that the possible effects on the financial statements of the inability to obtain sufficient evidence (i.e. a scope limitation) could be both material and pervasive


2. Indicate whether each phrase is more descriptive of financial accounting or managerial accounting.


(a) May be subjective


Financial accounting


Managerial accounting



(b) Often used to obtain financing


Financial accounting


Managerial accounting



(c) Typically prepared quarterly or annually


Financial accounting


Managerial accounting



(d) May measure time or customer satisfaction


Financial accounting


Managerial accounting



(e) Future oriented


Financial accounting


Managerial accounting



(f) Has a greater emphasis on cost-benefit analysis


Financial accounting


Managerial accounting



(g) Keeps records of assets and liabilities


Financial accounting


Managerial accounting



(h) Highly aggregated statements


Financial accounting


Managerial accounting



(i) Must conform to external standards


Financial accounting


Managerial accounting



(j) Special-purpose reports


Financial accounting


Managerial accounting



(k) Decision-making tool


Financial accounting


Managerial accounting



(l) Income statement, balance sheet, and statement of cash flows


Financial accounting


Managerial accounting


3.

Calculate the following.

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Use the accompanying solution sheet to reply to the eight situations below that relate to the audit of financial statements of nonpublic companies. Unless indicated otherwise, assume that material amounts are involved. Do not consider including an emphasis-of-matter paragraph in an "auditor discretionary" circumstance. Situations: 1. A company has departed from GAAP. 2. A company's inventory records were deficient and the auditor was required to satisfy herself that the inventory was properly stated using alternative procedures. She is satisfied that she has sufficient appropriate evidence. . In auditing a client, an auditor has determined that substantial doubt exists about an entity's ability to continue as a going concern. A group auditor decides not to take responsibility for the work of the component auditor who audited a 70% owned subsidiary and issued an unmodified opinion. The total assets and revenues of the subsidiary are 5% and 8%, respectively, of the total assets and revenues of the entity being audited. 5. A company changes from FIFO to LIFO for inventory valuation and the auditor concurs with the change. The change has a material effect on the comparability of the entity's financial statements this year, but is expected to have an immaterial effect in the future. 6. Inadequate record retention policies by the client have resulted in a situation in which a CPA is unable to obtain sufficient appropriate audit evidence with respect to a material account. 7. A CPA has decided to emphasize in the audit report that the company she audited is a component of XYZ Company, its parent. B. A client has changed its estimate of likely doubtful accounts from 2% of credit sales to 3%. The auditor believes the change to be reasonable. Reply as to the type of opinion and other modification to the audit report as follows: A. Adverse D. Disclaimer Q. Qualified Unmodified Other Modification COM Add an emphasis-of-matter paragraph. OM Add an other-matter paragraph. BFM Add a basis for modification paragraph. OTHER Make modifications other than adding an additional paragraph. NONE Make no modifications. If more than one type of opinion is appropriate list each-one with "Report 1" and one with "Report 2." If only "Report 1" Is appropriate, place an X in the "Report 2" Opinion Type cell, which indicates no second type of report is appropriate.

The efficient markets hypothesis dujust rapidly to new information future stock returns cannot be predicted from any information that is publicly available allowed to trade freely D. A and B C. corporate insiders should have no better investment performance than other investors even if E. B and C f-Answer Questions (3 questions, 15 points, suggested time 15 minutes) wer each question in two to three sentences. (5 points) When is a company's value of growth (PVGO) a negative number (i.e., when does higher growth result in a lower stock price)? (5 points) A stock's forward P/E ratio is higher than the average P/E of all of the companies in its industry. Does this mean that the stock is over-valued (priced too high)? Briefly explain your answer. In discussing a mutual fund's performance, what is meant by the term "turnover"? Is higher or lower turnover better for mutual fund investors? Explain why. blems (6 questions, 55 points, suggested time 55 minutes) full credit on the problems, show all work and label answers clearly. Show in detail how you arrive at your wers: show the formulas you use and your step-by-step calculations; document assumptions. (12 points) Your predictions for the returns on two stocks are summarized in the table below: Return on Scenario Probability Stock A Stock B Recession (.25) .09 Slow growth 206 .09 Moderate growth 25 .11 High growth .50 .22 Standard deviation 250 .050 Beta 1.40 e covariance of the two stocks is .01 and their correlation coefficient is .80. If you invest 40% of your rifolio in stock A and 60% of your money in stock B, what will be your portfolio's Expected return? Standard deviation? Beta? pints) A stock is currently selling for $60 a share. You decide to short-sell 300 shares of the stock. Your er's margin requirements for short sales are 60% initial margin and 40% maintenance margin. How much will you need to deposit in your margin account when you do the short sale? On a per-share basis, what will your dollar profit/loss be if the stock's price rises to $75? an the stock's price rise before you get a margin call? (This is the same as asking I to the margin required by your broker.)

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