For each of the following brief scenarios, assume that you are reporting on a client’s financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition:

Unless stated otherwise, assume the matter involved is material. If the problem doesn’t tell you whether a misstatement pervasively misstates the financial statements or doesn’t list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9).

Do not read more into the circumstances than what is presented.

Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter.

* Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all.

1. A company has not followed generally accepted accounting principles in the recoeding of its leases.

2. A company has not followed generally accepted accounting principles in the recording of its leases. The amounts involved are immaterial.

3. A company valued its inventory at current replacement cost. Although the auditor believes that the inventory costs do not approximate replacement costs, these costs do not approximate any gaap inventory valuation method.

4. A client changed its depreciation method for production equipment from straight line method to the units of production method based on hours of utilization. The auditor concurs with the change.

5. A client changed its depreciation method for production equipment from straight line method to the units of production method based on hours of utilization. the auditor does not concur with the change.

6. A client changed the depreciable life of certain assets from 10 years to 12 years . the auditor concurs with the change.

7. A client changed the depreciable life of certain assets from 10 year to 12 years. the auditor does not concur with the change. confined to fixed assets and accumulated depreciation the misstatements involved are are not considerd pervasive.

8. A client changed the method it uses to calculate postemployment benefits from one acceptable method to antoher. the effect of the change is immaterial this year but is expected to be material in the future

9 A client changes the salvage value of certain assets from 5 percent to 10 percent of original cost . the auditor concurs the change.

10. a client uses the specific identification method of accounting for valuable items in inventory and LIFO for less valuable items in inventory. the audtior concurs that this is a reasonable practice.

11. due to reocurring operating losses and working capital deficiences an auditor has substantial doubt about an entitys ability to continue as a going concern for a reasonable period of time. the notes to the financial statmeent adequatley disclose the substantial doubt situation . the auditor has decided not to issue disclaimer of opinion.

12. due to reocurring operating losses and working capital deficiences an auditor has substantial doubt about an entitys ability to continue as a going concern for a reasonable period of time. the notes to the financial statmeent adequatley disclose the substantial doubt situation and the auditor believes the omission fundamentally affects the users understanding of the financial statements.

13. an audtior reporting on a group financial statements decide to take responsibility for the work of a component auditor who audited a 70 percent ownded subsidiary and issued an unmodified opinion. the total assets and revenues of the subsidiary 5 percent and 8 percent respectively of the total assets and revenue of the entity being audited.

14. an audtior reporting on a group financial statements decides not to take responsibility for the work of a component auditor who audited a 70 percent ownded subsidiary and issued an unqualified opinion. the total assets and revenues of the subsidiary 5 percent and 8 percent respectively of the total assets and revenue of the entity being audited.

15. an auditor was hired after year end and was unable to observe the counting of the year end inventory. she is uanble to apply other procedures to determine whether ending inventory and other related information are properly stated

Question

For each of the following brief scenarios, assume that you are reporting on a client’s financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition:

Unless stated otherwise, assume the matter involved is material. If the problem doesn’t tell you whether a misstatement pervasively misstates the financial statements or doesn’t list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9).
Do not read more into the circumstances than what is presented.
Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter.

* Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all.

1. A company has not followed generally accepted accounting principles in the recoeding of its leases.

2. A company has not followed generally accepted accounting principles in the recording of its leases. The amounts involved are immaterial.

3. A company valued its inventory at current replacement cost. Although the auditor believes that the inventory costs do not approximate replacement costs, these costs do not approximate any gaap inventory valuation method.

4. A client changed its depreciation method for production equipment from straight line method to the units of production method based on hours of utilization. The auditor concurs with the change.

5. A client changed its depreciation method for production equipment from straight line method to the units of production method based on hours of utilization. the auditor does not concur with the change.

6. A client changed the depreciable life of certain assets from 10 years to 12 years . the auditor concurs with the change.

7. A client changed the depreciable life of certain assets from 10 year to 12 years. the auditor does not concur with the change. confined to fixed assets and accumulated depreciation the misstatements involved are are not considerd pervasive.

8. A client changed the method it uses to calculate postemployment benefits from one acceptable method to antoher. the effect of the change is immaterial this year but is expected to be material in the future

9 A client changes the salvage value of certain assets from 5 percent to 10 percent of original cost . the auditor concurs the change.

10. a client uses the specific identification method of accounting for valuable items in inventory and LIFO for less valuable items in inventory. the audtior concurs that this is a reasonable practice.

11. due to reocurring operating losses and working capital deficiences an auditor has substantial doubt about an entitys ability to continue as a going concern for a reasonable period of time. the notes to the financial statmeent adequatley disclose the substantial doubt situation . the auditor has decided not to issue disclaimer of opinion.

12. due to reocurring operating losses and working capital deficiences an auditor has substantial doubt about an entitys ability to continue as a going concern for a reasonable period of time. the notes to the financial statmeent adequatley disclose the substantial doubt situation and the auditor believes the omission fundamentally affects the users understanding of the financial statements.

13. an audtior reporting on a group financial statements decide to take responsibility for the work of a component auditor who audited a 70 percent ownded subsidiary and issued an unmodified opinion. the total assets and revenues of the subsidiary 5 percent and 8 percent respectively of the total assets and revenue of the entity being audited.

14. an audtior reporting on a group financial statements decides not to take responsibility for the work of a component auditor who audited a 70 percent ownded subsidiary and issued an unqualified opinion. the total assets and revenues of the subsidiary 5 percent and 8 percent respectively of the total assets and revenue of the entity being audited.

15. an auditor was hired after year end and was unable to observe the counting of the year end inventory. she is uanble to apply other procedures to determine whether ending inventory and other related information are properly stated

Accepted Answer

Solution 
Financial statements are written reports that is created by company's management to…