For each situation, identify the appropriate audit report and briefly explain the rationale for selecting the report. During the course of the audit of Sail-Away Company, the auditor noted that the current ratio has dropped to 1.75. the company’s loan covenant requires the maintenance of a current ratio of 2.0, or the company’s det is all immediately due. The auditor and the company have contacted the bank, which is not willing to waive the loan covenant because the company has been experiencing operating losses for the past few years and has an inadequate capital structure. The auditor has substantial doubt that the company can find adequate financing elsewhere and may encounter difficulties staying in operation. Management, however, is confident that it can overcome the problem. The company does not deem it necessary to include any additional disclosure because management members are confident that an alternative source of funds will be found by pledging their personal assets. The Wear-ever Wholesale Company has been very profitable. It recently received notice of a 10% price increase for a significant portion of its inventory. The company believes it is important to manage its products wisely and has policy of writing all inventory up to current replacement cost. This assures that profits will be recognized on sales sufficient to replace the asset and realize a normal profit. This operating philosophy has been successful, and all salespeople reference current cost, not historical cost, in making sales. Only inventory has been written up to replacement cost, but inventory is material because the company carries a wide range of products. The company’s policy of writing up the inventory and its peso effects is adequately described in a footnote to the financial statements. For the current year, the net effect of the inventory write-up increased reported income by only 3% and assets by 15% above historical cost. The audit of NewCo was staffed primarily by three new hires and a relatively inexperienced senior auditor. The manager found numerous errors during the conduct of the audit and developed very long to-do lists for all members of the audit to complete before the audit was concluded. Although the manager originally doubted the staff’s understanding of the audit procedures, by the time the audit was finished, he concluded that the new auditors did understand the company and the audit process and that no material errors existed in the financial statements

For each situation, identify the appropriate audit report and briefly explain the rationale for selecting the report. During the course of the audit of Sail-Away Company, the auditor noted that the current ratio has dropped to 1.75. the company’s loan covenant requires the maintenance of a current ratio of 2.0, or the company’s det is all immediately due. The auditor and the company have contacted the bank, which is not willing to waive the loan covenant because the company has been experiencing operating losses for the past few years and has an inadequate capital structure. The auditor has substantial doubt that the company can find adequate financing elsewhere and may encounter difficulties staying in operation. Management, however, is confident that it can overcome the problem. The company does not deem it necessary to include any additional disclosure because management members are confident that an alternative source of funds will be found by pledging their personal assets. The Wear-ever Wholesale Company has been very profitable. It recently received notice of a 10% price increase for a significant portion of its inventory. The company believes it is important to manage its products wisely and has policy of writing all inventory up to current replacement cost. This assures that profits will be recognized on sales sufficient to replace the asset and realize a normal profit. This operating philosophy has been successful, and all salespeople reference current cost, not historical cost, in making sales. Only inventory has been written up to replacement cost, but inventory is material because the company carries a wide range of products. The company’s policy of writing up the inventory and its peso effects is adequately described in a footnote to the financial statements. For the current year, the net effect of the inventory write-up increased reported income by only 3% and assets by 15% above historical cost. The audit of NewCo was staffed primarily by three new hires and a relatively inexperienced senior auditor. The manager found numerous errors during the conduct of the audit and developed very long to-do lists for all members of the audit to complete before the audit was concluded. Although the manager originally doubted the staff’s understanding of the audit procedures, by the time the audit was finished, he concluded that the new auditors did understand the company and the audit process and that no material errors existed in the financial statements

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

Chapter15: Audit Reports For Financial Statement Audits

Section: Chapter Questions

Problem 33RQSC

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For each situation, identify the appropriate audit report and briefly explain the rationale for selecting the report.

During the course of the audit of Sail-Away Company, the auditor noted that the current ratio has dropped to 1.75. the company’s loan covenant requires the maintenance of a current ratio of 2.0, or the company’s det is all immediately due. The auditor and the company have contacted the bank, which is not willing to waive the loan covenant because the company has been experiencing operating losses for the past few years and has an inadequate capital structure. The auditor has substantial doubt that the company can find adequate financing elsewhere and may encounter difficulties staying in operation. Management, however, is confident that it can overcome the problem. The company does not deem it necessary to include any additional disclosure because management members are confident that an alternative source of funds will be found by pledging their personal assets.
The Wear-ever Wholesale Company has been very profitable. It recently received notice of a 10% price increase for a significant portion of its inventory. The company believes it is important to manage its products wisely and has policy of writing all inventory up to current replacement cost. This assures that profits will be recognized on sales sufficient to replace the asset and realize a normal profit. This operating philosophy has been successful, and all salespeople reference current cost, not historical cost, in making sales. Only inventory has been written up to replacement cost, but inventory is material because the company carries a wide range of products. The company’s policy of writing up the inventory and its peso effects is adequately described in a footnote to the financial statements. For the current year, the net effect of the inventory write-up increased reported income by only 3% and assets by 15% above historical cost.
The audit of NewCo was staffed primarily by three new hires and a relatively inexperienced senior auditor. The manager found numerous errors during the conduct of the audit and developed very long to-do lists for all members of the audit to complete before the audit was concluded. Although the manager originally doubted the staff’s understanding of the audit procedures, by the time the audit was finished, he concluded that the new auditors did understand the company and the audit process and that no material errors existed in the financial statements.

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