Question

Indicate the type of audit report(s) that would be appropriate in each of the following situations.

a.   A company has departed from GAAP.
b. 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.
c.   In auditing a client, an auditor has determined that substantial doubt exists about an entity's

ability to continue as a going concern.
d. A group auditor decides 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.
e. 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.
f.   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.
g.   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.

Answer 1

a)A company has departed from GAAP
---Qualified or Adverse (bc GAAP modified)
b)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
---Unmodified (clean)
c)In auditing a client, an auditor has determined that substantial doubt exists about an entity's ability to continue as going concern
---Unmodified w/ emphasis paragraph of disclaimer
d)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
---Unmodified w/ alterations (group audit)
e)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
---Unmodified w/ Emphasis of Matter paragraph (GAAP not consistent)
f)Inadequate records 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 and is not pervasive
---Qualified "except for"

g)A client has changed its estimate of likely doubtful accounts from 2% credit sales to 3%. The auditor believes the change to be reasonable
---Clean standard unmodified