3-24, 3-25, 3-30

3-24 (OBJECTIVES 3-1, 3-2, 3-4, 3-6, 3-7) Patel, CPA, has completed the audit of the financial statements of Bellamy Corporation as of and for the year ended December 31, 2019. Patel also audited and reported on the Bellamy financial statements for the prior year. Patel drafted the following report for 2019. We have audited the balance sheet and statements of income and retained earnings of Bellamy Corporation as of December 31, 2019. In our opinion, the financial statements referred to above present fairly the fi- nancial position of Bellamy Corporation as of December 31, 2019, and the results of its operations for the year then ended in conformity with generally accepted auditing standards, applied on a basis consistent with those of the preceding year. We conducted our audit in accordance with generally accepted accounting stan- dards. Those standards require that we plan and perform the audit to obtain reason- able assurance about whether the financial statements are free of misstatement. We believe that our audits provide a reasonable basis for our opinion. Patel, CPA (Signed) . Other Information Bellamy is a private corporation and is presenting comparative financial statements. . During 2019, Bellamy acquired Stockard Inc. and the effects of that transaction are reflected in the current year financial statements. Information about this transaction is disclosed in footnote 12. Patel was unable to perform normal accounts receivable confirmation proce- dures for accounts that are material, but not pervasive, to the financial state- ments. Unfortunately, Patel was not able to perform alternative procedures to support the existence of the receivables. Bellamy Corporation is the defendant in litigation where there is a reasonable possibility that Bellamy may be required to pay a substantial amount of cash, which might require the sale of certain fixed assets. Because management does not want to provide any information that the plaintiff might use against Bellamy, the case is not discussed in the financial statements. Bellamy issued debentures on January 31, 2018, in the amount of $10 million. The funds obtained from the issuance were used to finance the expansion of plant facilities. The debenture agreement restricts the payment of future cash . Required dividends to earnings after December 31, 2023. Bellamy has disclosed this in the footnotes to the financial statements. a. Identify and explain any items included in "Other Information" that need not be part of the auditor's report. b. Explain the deficiencies in Patel's report as drafted." 3-25 (OBJECTIVES 3-4,3-5,3-6.3-72. Thof 3-25 (OBJECTIVES 3-4, 3-5, 3-6, 3-7, 3-8) The following are independent situations for which you will recommend an appropriate audit report: 1. Subsequent to the date of the financial statements as part of his post-balance sheet date audit procedures, a CPA learned that a recent fire caused heavy damage to one of a client's two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail. The financial statements and footnotes as prepared by the client did not disclose the loss caused by the fire. 2. During the course of his audit of the financial statements of a corporation for the purpose of expressing an opinion on the statements, a CPA is refused permission to inspect the minutes of board of directors' meetings that document significant deci- sions of the board. The corporation secretary instead offers to give the CPA a certified copy of all resolutions and actions involving accounting matters. 3. A CPA is engaged in the audit of the financial statements of a large manufacturing company with branch offices in many widely separated cities. The CPA was not able to count the substantial undeposited cash receipts at the close of business on the last day of the fiscal year at all branch offices. As an alternative to this auditing procedure used to verify the accurate cutoffof cash re- ceipts, the CPA observed that deposits in transit as shown on the year-end bank reconcili- ation appeared as credits on the bank statement on the first business day of the new year. He was satisfied as to the cutoff of cash receipts by the use of the alternative procedure. 4. On January 2, 2020, the Retail Auto Parts Company received a notice from its primary supplier that effective immediately, all wholesale prices will be increased by 10 percent. On the basis of the notice, Retail Auto Parts revalued its December 31, 2019, inventory to reflect the higher costs. The inventory constituted a material proportion of total as sets; however, the effect of the revaluation was material to current assets but not to total assets or net income. The increase in valuation is adequately disclosed in the footnotes. 5. A CPA has completed her audit of the financial statements of a bus company for the year ended December 31, 2019. Prior to 2019, the company depreciated its buses over a 10-year period. During 2019, the company determined that a more realistic esti- mated life for its buses was 12 years and computed the 2019 depreciation on the basis of the revised estimate. The CPA has satisfied herself that the 12-year life is reasonable. The company has adequately disclosed the change in estimated useful lives of its buses and the effect of the change on 2019 income in a note to the financial statements. 6. E-Lotions.com, Inc., is an online retailer of body lotions and other bath and body supplies. The company records revenues at the time customer orders are placed on the website, rather than when the goods are shipped, which is usually two days after the order is placed. The auditor determined that the amount of orders placed but not shipped as of the balance sheet date is not material. For each situation, do the following: a. Identify which of the conditions requiring a deviation from a standard unmodified opinion audit report is applicable, if any. b. State the level of materiality as immaterial, material, or highly material. If you cannot de- cide the level of materiality, state the additional information needed to make a decision. c. Given your answers in parts a. and b., state the appropriate audit report from the fol- lowing alternatives (if you have not decided on one level of materiality in part b., state the appropriate report for each alternative materiality level): (1) Unmodified opinion-standard wording (2) Unmodified opinion-explanatory paragraph (3) Unmodified opinion-nonstandard report wording (4) Qualified opinion-GAAP departure (5) Qualified opinion-scope limitation (6) Disclaimer (7) Adverse 3-26 On 3-30 (OBJECTIVES 3-3, 3-4) Publicly traded companies must electronically file a variety of forms or reports with the SEC, including the Form 10-K, which includes the audited annual financial statements. The SEC makes most of these electronic documents available on the Internet via EDGAR, which stands for Electronic Data Gathering, Analysis, and Retrieval system. The pri- mary purpose for EDGAR is to increase the efficiency and fairness of the securities market for the benefit of investors, corporations, and the economy by accelerating the receipt, acceptance, dissemination, and analysis of time-sensitive corporate information filed with the agency. a. Visit the SEC website (www.sec.gov) and use the link to "Company Filings Search" Re (under "Filings") to locate the Form 10-K filing for Facebook, Inc., for the year ended December 31, 2017, to answer the following questions: 1. Who was Facebook's auditor? 2. Did the audit firm issue a combined or separate report(s) on the financial state- ments and on internal controls over financial reporting? 3. What type of audit opinion did the auditor provide for the financial statements? 4. What was the auditor's opinion about internal controls over financial reporting? 5. What was the report date for the audit report? b. Visit the PCAOB's website (www.pcaob.org) and use the link to "Auditing" under the heading for "Standards" to locate the PCAOB's Auditing Standards. Search the links to the Auditing Standards to answer the following questions: 1. Where would the auditor locate guidance about changes to the auditor's report if Facebook makes a change in accounting principle that is considered material? Identify the appropriate section in the Auditing Standards and identify the rel- evant paragraph(s) within that section that would be applicable to this situation. Assume that Facebook properly reports the change in the financial statements. 2. Where would the auditor locate guidance to determine the effect on the auditor's report if he or she has substantial doubt about Facebook's ability to continue as a going concern? Identify the appropriate section and the relevant paragraph(s) within that section that would be applicable to this situation. 3. Facebook's Form 10-K contains information that is in addition to the financial state- ments and related footnotes. Where would the auditor locate guidance that addresses his or her responsibility for this other information and what is the auditor's obliga- tion related to that information? Identify the appropriate section and the relevant paragraph(s) within that section that would be applicable to this situation. 5 e Hit res sis s": Chanter 2/4 3-24 (OBJECTIVES 3-1, 3-2, 3-4, 3-6, 3-7) Patel, CPA, has completed the audit of the financial statements of Bellamy Corporation as of and for the year ended December 31, 2019. Patel also audited and reported on the Bellamy financial statements for the prior year. Patel drafted the following report for 2019. We have audited the balance sheet and statements of income and retained earnings of Bellamy Corporation as of December 31, 2019. In our opinion, the financial statements referred to above present fairly the fi- nancial position of Bellamy Corporation as of December 31, 2019, and the results of its operations for the year then ended in conformity with generally accepted auditing standards, applied on a basis consistent with those of the preceding year. We conducted our audit in accordance with generally accepted accounting stan- dards. Those standards require that we plan and perform the audit to obtain reason- able assurance about whether the financial statements are free of misstatement. We believe that our audits provide a reasonable basis for our opinion. Patel, CPA (Signed) . Other Information Bellamy is a private corporation and is presenting comparative financial statements. . During 2019, Bellamy acquired Stockard Inc. and the effects of that transaction are reflected in the current year financial statements. Information about this transaction is disclosed in footnote 12. Patel was unable to perform normal accounts receivable confirmation proce- dures for accounts that are material, but not pervasive, to the financial state- ments. Unfortunately, Patel was not able to perform alternative procedures to support the existence of the receivables. Bellamy Corporation is the defendant in litigation where there is a reasonable possibility that Bellamy may be required to pay a substantial amount of cash, which might require the sale of certain fixed assets. Because management does not want to provide any information that the plaintiff might use against Bellamy, the case is not discussed in the financial statements. Bellamy issued debentures on January 31, 2018, in the amount of $10 million. The funds obtained from the issuance were used to finance the expansion of plant facilities. The debenture agreement restricts the payment of future cash . Required dividends to earnings after December 31, 2023. Bellamy has disclosed this in the footnotes to the financial statements. a. Identify and explain any items included in "Other Information" that need not be part of the auditor's report. b. Explain the deficiencies in Patel's report as drafted." 3-25 (OBJECTIVES 3-4,3-5,3-6.3-72. Thof 3-25 (OBJECTIVES 3-4, 3-5, 3-6, 3-7, 3-8) The following are independent situations for which you will recommend an appropriate audit report: 1. Subsequent to the date of the financial statements as part of his post-balance sheet date audit procedures, a CPA learned that a recent fire caused heavy damage to one of a client's two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail. The financial statements and footnotes as prepared by the client did not disclose the loss caused by the fire. 2. During the course of his audit of the financial statements of a corporation for the purpose of expressing an opinion on the statements, a CPA is refused permission to inspect the minutes of board of directors' meetings that document significant deci- sions of the board. The corporation secretary instead offers to give the CPA a certified copy of all resolutions and actions involving accounting matters. 3. A CPA is engaged in the audit of the financial statements of a large manufacturing company with branch offices in many widely separated cities. The CPA was not able to count the substantial undeposited cash receipts at the close of business on the last day of the fiscal year at all branch offices. As an alternative to this auditing procedure used to verify the accurate cutoffof cash re- ceipts, the CPA observed that deposits in transit as shown on the year-end bank reconcili- ation appeared as credits on the bank statement on the first business day of the new year. He was satisfied as to the cutoff of cash receipts by the use of the alternative procedure. 4. On January 2, 2020, the Retail Auto Parts Company received a notice from its primary supplier that effective immediately, all wholesale prices will be increased by 10 percent. On the basis of the notice, Retail Auto Parts revalued its December 31, 2019, inventory to reflect the higher costs. The inventory constituted a material proportion of total as sets; however, the effect of the revaluation was material to current assets but not to total assets or net income. The increase in valuation is adequately disclosed in the footnotes. 5. A CPA has completed her audit of the financial statements of a bus company for the year ended December 31, 2019. Prior to 2019, the company depreciated its buses over a 10-year period. During 2019, the company determined that a more realistic esti- mated life for its buses was 12 years and computed the 2019 depreciation on the basis of the revised estimate. The CPA has satisfied herself that the 12-year life is reasonable. The company has adequately disclosed the change in estimated useful lives of its buses and the effect of the change on 2019 income in a note to the financial statements. 6. E-Lotions.com, Inc., is an online retailer of body lotions and other bath and body supplies. The company records revenues at the time customer orders are placed on the website, rather than when the goods are shipped, which is usually two days after the order is placed. The auditor determined that the amount of orders placed but not shipped as of the balance sheet date is not material. For each situation, do the following: a. Identify which of the conditions requiring a deviation from a standard unmodified opinion audit report is applicable, if any. b. State the level of materiality as immaterial, material, or highly material. If you cannot de- cide the level of materiality, state the additional information needed to make a decision. c. Given your answers in parts a. and b., state the appropriate audit report from the fol- lowing alternatives (if you have not decided on one level of materiality in part b., state the appropriate report for each alternative materiality level): (1) Unmodified opinion-standard wording (2) Unmodified opinion-explanatory paragraph (3) Unmodified opinion-nonstandard report wording (4) Qualified opinion-GAAP departure (5) Qualified opinion-scope limitation (6) Disclaimer (7) Adverse 3-26 On 3-30 (OBJECTIVES 3-3, 3-4) Publicly traded companies must electronically file a variety of forms or reports with the SEC, including the Form 10-K, which includes the audited annual financial statements. The SEC makes most of these electronic documents available on the Internet via EDGAR, which stands for Electronic Data Gathering, Analysis, and Retrieval system. The pri- mary purpose for EDGAR is to increase the efficiency and fairness of the securities market for the benefit of investors, corporations, and the economy by accelerating the receipt, acceptance, dissemination, and analysis of time-sensitive corporate information filed with the agency. a. Visit the SEC website (www.sec.gov) and use the link to "Company Filings Search" Re (under "Filings") to locate the Form 10-K filing for Facebook, Inc., for the year ended December 31, 2017, to answer the following questions: 1. Who was Facebook's auditor? 2. Did the audit firm issue a combined or separate report(s) on the financial state- ments and on internal controls over financial reporting? 3. What type of audit opinion did the auditor provide for the financial statements? 4. What was the auditor's opinion about internal controls over financial reporting? 5. What was the report date for the audit report? b. Visit the PCAOB's website (www.pcaob.org) and use the link to "Auditing" under the heading for "Standards" to locate the PCAOB's Auditing Standards. Search the links to the Auditing Standards to answer the following questions: 1. Where would the auditor locate guidance about changes to the auditor's report if Facebook makes a change in accounting principle that is considered material? Identify the appropriate section in the Auditing Standards and identify the rel- evant paragraph(s) within that section that would be applicable to this situation. Assume that Facebook properly reports the change in the financial statements. 2. Where would the auditor locate guidance to determine the effect on the auditor's report if he or she has substantial doubt about Facebook's ability to continue as a going concern? Identify the appropriate section and the relevant paragraph(s) within that section that would be applicable to this situation. 3. Facebook's Form 10-K contains information that is in addition to the financial state- ments and related footnotes. Where would the auditor locate guidance that addresses his or her responsibility for this other information and what is the auditor's obliga- tion related to that information? Identify the appropriate section and the relevant paragraph(s) within that section that would be applicable to this situation. 5 e Hit res sis s": Chanter 2/4