Auditing P 3-28
For the following independent situations, assume that you are the audit partner on the engagement:
During your audit of Debold.com, Inc. you conclude that there is a
possibility that inventory is materially overstated. The client refuses
to allow you to expand the scope of your audit sufficiently to verify
whether the balance is actually misstated.
2. Four weeks after the
year-end date, a major customer of Prince Construction Co. declared
bankruptcy. Because the customer had confirmed the balance due to Prince
at the balance sheet date, management refuses to charge off the account
or otherwise disclose the information. The receivable represents
approximately 10% of accounts receivable and 20% of net earnings before
3. You complete the audit of Johnson Department Store, and in
your opinion, the financial statements are fairly presented. On the last
day of the audit, you discover that one of your supervisors assigned to
the audit has a material investment in Johnson.
4. Auto Delivery
Company has a fleet of several delivery trucks. In the past, Auto
Delivery had followed the policy of purchasing all equipment. In the
current year, they decided to lease the trucks. The method of accounting
for the trucks is therefore changed to lease capitalization. This
change in policy is fully disclosed in footnotes.
5. You are auditing
Woodcolst Linen Services ford the first time. Woodcolst has been in
business for several years but has never had an audit before. After the
audit is completed, you conclude that the current year balance sheet is
stated correctly in accordance with GAAP. The client did not authorize
you to do test work for any of the previous years.
6. You were
engaged to audit the Cutter Steel Company’s financial statements after
the close of the corporation’s fiscal year. Because you were not engaged
until after the balance sheet date, you were not able to physically
observe inventory, which is highly material. On the completion of your
audit, you are satisfied that Cutter’s financial statements are
presented fairly, including inventory about which you were able to
satisfy yourself by the use of alternative audit procedures.
For each situation, do the following:
Identify which of the conditions requiring a modification of or a
deviation from an unqualified standard report is applicable.
the level of materiality as immaterial, material, or highly material.
If you cannot decide the level of materiality, state the additional
information needed to make a decision.
c. Given your answers in parts
a and b, sate the type of audit report that should be issued. If you
have not decided on level of materiality in part b, state the
appropriate report for each alternative materiality level.
Auditing P 3-28