The business activities of Casa Royale, Inc., consist of the administration and maintenance of approximately 400 condominiums and common property owned by individuals in a suburban residential development. Revenue consists of monthly fees collected from each condominium owner, plus some miscellaneous revenue. The principal expenses are property taxes and maintenance of all the buildings, shrubbery, swimming pools, lakes, parking lots, and other facilities. The furni- ture, fixtures, and equipment owned by the corporation and used to perform its maintenance func- tions represent about 25 percent of its total assets of $400,000. The corporation retained Howard Smith, CPA, to perform an audit of its financial statements for the current year and received from him the following audit report.

The note to the financial statements referred to in the audit report read as follows: "The equipment necessary for administration and maintenance was acquired in various years going back as far as the origin of the Corporation 10 years ago. Therefore, the records do not lend themselves readily to application of standard auditing procedures and are not included in our engagement of independent auditors. The equipment is being depreciated using the straight-line method over various estimated useful lives."

Required: 

a. What type of audit report did the CPA issue? Was this the appropriate type of report under the circumstances? Explain.

b. What contradiction, if any, exists between the scope paragraph of the audit report and the note to the financial statements? Do you consider the note to be a reasonable statement? Why or why not?

c. Did the omission of the examination of plant assets from the audit engagement have any bearing on the evidence needed by the auditor in order to express an opinion on the income statement? Explain fully.

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Board of Governors Casa Royale, Inc. INDEPENDENT AUDITORS' REPORT I have audited the accompanying balance sheet of Casa Royale, Inc., as of December 31, 20X1, and the related statements of income, retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial state- ment presentation. I believe that my audit provides a reasonable basis for my opinion. (continued)