Discuss whether the changes described in each of the cases below require recognition in the CPA’s audit report as to consistency. (Assume that the amounts are material.) a. The company changed its inventory method to FIFO from weighted-average, which had been used in prior years. b. The company disposed of one of the two subsidiaries that had been included in its consolidated statements for prior years. c. The estimated remaining useful life of plant property was reduced because of obsolescence.

Discuss whether the changes described in each of the cases below require recognition in the CPA’s audit report as to consistency. (Assume that the amounts are material.) a. The company changed its inventory method to FIFO from weighted-average, which had been used in prior years. b. The company disposed of one of the two subsidiaries that had been included in its consolidated statements for prior years. c. The estimated remaining useful life of plant property was reduced because of obsolescence.

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter6: Audit Evidence

Section: Chapter Questions

Problem 15RQSC

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Which of these situations would require auditors to append an emphasis-of-matter paragraph about consistency to an otherwise unmodified opinion?a. Entity changed its estimated allowance for uncollectible accounts receivable.b. Entity corrected a prior mistake in accounting for interest capitalization. c. Entity sold one of its subsidiaries and consolidated six subsidiaries this year comparedto seven last year.d. Entity changed its inventory costing method from FIFO to LIFO
You have performed preliminary analytical procedures on one of your audit engagements and observed the following independent situations: The allowance for obsolete inventory increased from the prior year, but the allowance as a percentage of inventory decreased from the prior year. Long-term debt increased from the prior year, but total interest expense decreased as a percentage of long-term debt. The dollar amount of operating income is consistent with the prior year although the entity was more profitable on a net income basis. The quick ratio decreased from the prior year, although the amount of cash and net accounts receivable is almost the same as the prior year. Required: Below are possible explanations for each of the observed changes in the financial statement amounts and ratios. For each observed change, select the most likely explanation(s) from the list below. Note: There may be more than one explanation for a given observed change, and an explanation…
Which of the following may not be included in a typical audit program for auditing Retained Earnings? a. Reference to market quotations for the granting of share options to employees. b. Reference to fair market value of real property declared as property dividends. c. Determination of the effect of a change in policy regarding the use of average cost formula for inventories for the current year, where the entity previously elected the first-in-first-out cost formula. d. Reference to market quotations for the declaration of a 10% stock dividends.
Jones, CPA, has completed the audit of Sarack Lumber Supply Co.and has issued a standard unqualified report. In addition to a report on the overall financialstatements, the company needs a special audited report on three specific accounts: sales,net fixed assets, and inventory valued at FIFO. The report is to be issued to Sarack’s lessor,who bases annual rentals on these three accounts. Jones was not aware of the need for thereport on the three specific accounts until after the overall audit was completed.a. Explain why Jones is unlikely to be able to issue the audit report on the three specificaccounts without additional audit tests.b. What additional tests are likely to be needed before the report on the three specificaccounts can be issued?c. Assuming that Jones is able to satisfy all the requirements needed to issue the reporton the three specific accounts, write the report. Make any necessary assumptions.
For the following independent events, assume that each has a material effect on the financial statements. The financial year of your audit client BLQ Ltd ended on 31 December 2018. Your audit report was signed on 20 February 2019 and the financial statements were issued on 4 March 2019. Listed below are events that have taken place. (a) On 14 February 2019: You discovered that 30% of BLQ Ltd’s inventory is destroyed by a fire on 7 January 2019. (b) On 10 March 2019, you discovered that BLQ Ltd had settled a class action lawsuit for $2 million on 30 January 2019. The class action was initiated by discontent customers in December 2017 for faulty products. The legal cost was disclosed as a provision worth $500,000 on the balance sheet. Required: For each of the events above, explain 1) the auditor’s responsibilities, 2) the appropriate accounting treatments and 3) the impact on audit report.
You are auditing Crown Corporation for the year ended 2022, Its reported net income for the year 2021 and 2022 were P 3,000,000 and P 4,000,000, respectively. During your audit, the following errors were revealed: 1. The inventory at the end of 2022 and 2023 were P 20,000 understated and P 18,000 overstated, respectively. 2. Recalculating the depreciation charges for 2023, you found out it was short by P 4,000. 3. The 15,000 insurance premium for three years was recorded using the income statement approach on January 1, 2021. No expense amount was extracted from the balance at the end 2021 and 2022. 4. An equipment was sold on December 31, 2022 for P 32,000. Its related cost was P 200,000 with zero carrying value on date of sale. The sale transaction was recorded on January 10, 2023. QUESTIONS: What is the correct net income for the year 2022? What is the correct net income for the year 2023?
Consider the following independent situations relating to the audit of five different audit clients for year ended 30 June 20X8. Assume that all the situations are material. (i) A new client has changed its valuation method of property, plant and equipment. It has adopted the Fair Value Revaluation Model to replace the Historic cost measurement method. Whilst the auditor does not object to the change in the valuation model, the new method has a material effect on the financial statements and has not been disclosed. A special meeting was held between the CFO and the Finance Team and the Lead Partner from the Audit team, but nothing was resolved ii) A new start-up company specialising in air-drone mail/package delivery has grown strongly in the past year. Over the past three years the company has made consistent losses, borrowed heavily, experienced staff turnover and dealt with some significant regulatory and operational issues. Nonetheless, the current CEO believes the company is…
Consider the following independent situations relating to the audit of five different audit clients for year ended 30 June 20X8. Assume that all the situations are material. (i) A new client has changed its valuation method of property, plant and equipment. It has adopted the Fair Value Revaluation Model to replace the Historic cost measurement method. Whilst the auditor does not object to the change in the valuation model, the new method has a material effect on the financial statements and has not been disclosed. A special meeting was held between the CFO and the Finance Team and the Lead Partner from the Audit team, but nothing was resolved. (ii) A new start-up company specialising in air-drone mail/package delivery has grown strongly in the past year. Over the past three years the company has made consistent losses, borrowed heavily, experienced staff turnover and dealt with some significant regulatory and operational issues. Nonetheless, the current CEO believes the company is…
Consider the following independent situations relating to the audit of five different audit clients for year ended 30 June 20X8. Assume that all the situations are material. For each of the above cases, state the appropriate audit opinion that the auditor would require. Give reasons 1. new client has changed its valuation method of property, plant and equipment. It has adopted the Fair Value Revaluation Model to replace the Historic cost measurement method. Whilst the auditor does not object to the change in the valuation model, the new method has a material effect on the financial statements and has not been disclosed. A special meeting was held between the CFO and the Finance Team and the Lead Partner from the Audit team, but nothing was resolved 2. (ii) A new start-up company specialising in air-drone mail/package delivery has grown strongly in the past year. Over the past three years the company has made consistent losses, borrowed heavily, experienced staff turnover and dealt with…
Which of the following procedures is usually performed by the auditor to determine if obsolete inventory exists? a. Footing the inventory subsidiary ledger b. Analysis of inventory turnover and sales reports c. Sample the inventory reported by the client, examine the purchase date and receiving reports d. Confirmation of inventory with client’s customers Which statement is true? a. The incomplete recording of asset disposals understates the asset balance b. Management may be incentivized to over-recognize impairments on machinery when the company is doing really well to lower the subsequent depreciation expenses c. Management never over-accrue impairments on machinery because it reduces the balance of assets d. Management may be incentivized to over-recognize impairments on machinery when the company is doing really well because auditors will be more skeptic over the performance that is “too good to be true”
Ambrose is auditing the financial statements of Mays (dated December 31, 2017). The date of the auditor’s report is February 17, 2018, and the audit report release date is February 20, 2018. For which of the following matters would Ambrose have the least responsibility?a. The obsolescence of inventory held on December 31, 2017, that was identified on January 20, 2018.b. A customer’s deteriorating financial condition that was identified on February 19, 2018.c. A merger that was announced by Mays and known by Ambrose on February 12, 2018.d. A major loss due to a catastrophe that occurred and was known by Ambrose on March 1, 2018.
For the following independent situations, assume that you are the audit partner on the engagement: 2. Company A has 20% inventory held by Just Department Store on a consignment basis. Confirmation request was not allowed to be sent to Just Department Store by Company A. You were only given the consignment agreement. Inventory represents 30% of the total asset. Discuss the most appropriate type of opinion the auditor should issue. Explain briefly the reason for the opinion.