1740 For each of the following brief scenarios, assume that you are the CPA reporting on the companys financial statements. Using the form included with this problem, describe the reporting circumstance involved, the type or types of opinion possible in the circumstance, and whether a section should be added to the audit report or whether a paragraph should be added to an existing section. Note that while other report changes may be required, this only addresses the issue of a possible additional section or paragraph being added. Because more than one report may be possible in several of the circumstances, a second type of opinion and report alteration row is added for each circumstance. For example, if the problem doesnt tell you whether a misstatement pervasively misstates the financial statements or doesnt list a characteristic that indicates pervasiveness, two reports may be possible.

In most cases, you will not need to use the second row. Do not read more into the circumstance than what is presented, and only reply emphasis-of-matter in auditor discretionary circumstances such as those suggested in the chapter. Unless stated otherwise, assume that the information presented is material to the financial statements. For the report modification reply for both nonpublic and public audit reports.

1. Your client has declined to depreciate its assets this year because the depreciation expense would reduce the years small income to a loss.

2. A clients financial statements follow GAAP, but you wish to emphasize that the client is a subsidiary of Webster Corporation in the audit report.

3. In auditing the long-term investments account of a new client, you are unable to obtain audited financial statements for the investee located in a foreign country. You conclude that sufficient appropriate audit evidence regarding this investment cannot be obtained.

4. Due to a very major lawsuit, you have substantial doubt about a clients ability to continue as a going concern for a reasonable period of time; you have decided not to disclaim an opinion. The financial statement disclosures related to this lawsuit are adequate.

5. You decide not to take responsibility for the work of the component auditors who audited a 70 percent owned subsidiary and issued an unmodified opinion. The total assets and revenues of the subsidiary are 5 percent and 8 percent, respectively, of the total assets and revenues of the entity being audited.

6. You decide to take responsibility for the work of the component auditors who audited a 70 percent owned subsidiary and issued an unmodified opinion. The total assets and revenues of the subsidiary are 5 percent and 8 percent, respectively, of the total assets and revenues of the entity being audited.

7. A company has changed the remaining life of a significant asset from 12 to 10 years. You believe that the change is reasonable.

8. A company changes from FIFO to LIFO for inventory valuation and you concur with the change. The change has an immaterial effect on the entitys financial statements this year, but it is expected to have a material effect in the future.

9. Your client is a defendant in a major lawsuit. It is probable that the company will experience a material loss due to the lawsuit, although it is impossible to calculate the likely amount. The financial statements include a note adequately describing the matter. You decide that a report with no mention of this matter is inappropriate and a disclaimer of opinion is not necessary.

10. Predecessor auditors audited last years financial statements and you audited the current year. You have decided not to ask the predecessor to reissue that audit report. Comparative financial statements are being issued on the two years.