AUDITOR'S REPORTS (30 points) For each of the following brief scenarios, assume that you are the CPA reporting on the client's non-public financial statements. Using the form included in this problem, describe the reporting circumstance involved, the type or types of opinion possible in the circumstance, and the appropriate report alterations. Since 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 a problem does not tell you whether a misstatement pervasively misstates the financial statements or doesn't 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 a matter" in circumstances such as those suggested in the chapter. Unless stated otherwise, assume that the information presented is material to the financial statements. Type of Opinion U=Unmodified M=Modified D = Disclaimer A = Adverse Circumstance GC = Going Concern CON = Consistency EMPH = Auditor Discretionary Emphasis of a Matter GROUP = Group Audit GAAP = Departure from GAAP CHGACCPRIN-Change in Accounting Principal CHGACCEST-Change in Accounting Estimate SCOPE = Scope Limitation COMP = Comparative Financial Statement NONE = No Circumstances Report Alteration(s) and Paragraph Modifications EOM = Emphasis of a Matter Paragraph added OM = Other Matter Paragraph Added BFM Basis for Modification Paragraph Added OTHER = Other Alteration, but NO Paragraph added. NO = No Alteration(s) SCENARIOS 1. A company has changed the remaining life of a significant asset from 12 to 10 years. You believe that the change is reasonable. 2. A company changes from FIFO to LIFO for inventory valuation and you concur with the change. The change has an material effect on the comparability of the entity's financial statements this year, and it is expected to have a material effect in the future. U, EOM 3. Your client is a defendant in a major lawsuit. It is possible that the company will lose a material amount due to this lawsuit, although it is possible to calculate the likely amount as $2,000,000. The financial statements include a note adequately describing the matter. 4. A client has departed from GAAP for what you consider to be justified reasons, as following GAAP would result in misleading financial statements. 5. A client's financial statements follow GAAP, but you wish to emphasize a significant related party transaction in the audit report. 6. In auditing the material 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 7. Your client failed to reclassify the current portion of long-term debt as a current liability. The amount is material. 8. Your client increased the allowance for uncollectible accounts receivable by a material amount that you consider to be excessive. The increase affects income before tax and accounts receivable (net). Cash flow is not affected. 9. Your audit disclosed a material overstatement in your client's inventories, which the client failed to recognize with an appropriate adjusting journal entry. 10. A client bills customers and recognizes revenues before delivery to the customer [bill and hold]. AUDITOR'S REPORTS (30 points) For each of the following brief scenarios, assume that you are the CPA reporting on the client's non-public financial statements. Using the form included in this problem, describe the reporting circumstance involved, the type or types of opinion possible in the circumstance, and the appropriate report alterations. Since 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 a problem does not tell you whether a misstatement pervasively misstates the financial statements or doesn't 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 a matter" in circumstances such as those suggested in the chapter. Unless stated otherwise, assume that the information presented is material to the financial statements. Type of Opinion U=Unmodified M=Modified D = Disclaimer A = Adverse Circumstance GC = Going Concern CON = Consistency EMPH = Auditor Discretionary Emphasis of a Matter GROUP = Group Audit GAAP = Departure from GAAP CHGACCPRIN-Change in Accounting Principal CHGACCEST-Change in Accounting Estimate SCOPE = Scope Limitation COMP = Comparative Financial Statement NONE = No Circumstances Report Alteration(s) and Paragraph Modifications EOM = Emphasis of a Matter Paragraph added OM = Other Matter Paragraph Added BFM Basis for Modification Paragraph Added OTHER = Other Alteration, but NO Paragraph added. NO = No Alteration(s) SCENARIOS 1. A company has changed the remaining life of a significant asset from 12 to 10 years. You believe that the change is reasonable. 2. A company changes from FIFO to LIFO for inventory valuation and you concur with the change. The change has an material effect on the comparability of the entity's financial statements this year, and it is expected to have a material effect in the future. U, EOM 3. Your client is a defendant in a major lawsuit. It is possible that the company will lose a material amount due to this lawsuit, although it is possible to calculate the likely amount as $2,000,000. The financial statements include a note adequately describing the matter. 4. A client has departed from GAAP for what you consider to be justified reasons, as following GAAP would result in misleading financial statements. 5. A client's financial statements follow GAAP, but you wish to emphasize a significant related party transaction in the audit report. 6. In auditing the material 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 7. Your client failed to reclassify the current portion of long-term debt as a current liability. The amount is material. 8. Your client increased the allowance for uncollectible accounts receivable by a material amount that you consider to be excessive. The increase affects income before tax and accounts receivable (net). Cash flow is not affected. 9. Your audit disclosed a material overstatement in your client's inventories, which the client failed to recognize with an appropriate adjusting journal entry. 10. A client bills customers and recognizes revenues before delivery to the customer [bill and hold]