not d decision 't that should be is , state the appropri. 3-26 (OBJECTIVES 3-4, 3-5, 3-6, 3-7, 3-8) For the following independent situations, assume that you are the audit partner on the engagement: ations, assume that 1. McClellan's Used Cars, a client of yours, recently changed its depreciation method from straight-line to sum-of-the-years' digits. The effect of the change on the current rs and your client year's income is not material, but in future years, you suspect the effect will become affic over the past material. The facts are adequately disclosed in footnotes. 2. Jordan Minerals recently decided to change its direction and spent the last 8 months out YogurtLand's developing business in the potash mining business. There are significant potential rewards, but the company's management recognizes that there are significant risks ponents. During in the business that could jeopardize the success of its existing mining business. n the demand for Since starting the new venture, the company has had no successes and some decline st. Management in profits. The facts are adequately disclosed in footnotes. escence. 3. You recently noticed that Janssen Technology Solutions routinely excludes their statement of cash flows in the company's annual financial statements. Their reason- cided to change ing, as explained to you, is that the statements are confusing to their readers, so they ment recognizes prefer to leave the information out. cess of its exist- 4. A group of longtime friends decided to try their hand at online art auctions and online uring the short trade in antiquities. Although their venture started out well enough, a market-wide ells and no suc- downturn in e-commerce sales abruptly plunged the start-up into the red. The future of the company looks bleak; both sales and cash position have declined substantially. If the market does not turn around soon, you think the company may not be able to continue to sum-of-the- 1, but the effect to operate. 5. The controller of a company you're auditing will not allow you to confirm the receiv- he footnotes. able balances from any of its customers. However, the amounts of the receivables are s throughout material in relation to the company's financial statements. You cannot use any other nal, your audit methods to check the receivable balances. ing standards 6. Your firm has been unusually busy, so you asked another CPA firm to do about 30% of the audit for Abdoun's Arts, Inc. After a thorough review of their working f inventory at papers, you are convinced that they did an excellent job on their portion of the audit. o Brentwood However, you are reluctant to take complete responsibility for their work. native proce- For each situation, do the following: Required a. Identify which of the conditions requiring a modification of or a deviation from an ned by a dif- unqualified report is applicable. believe they b. State the level of materiality as immaterial, material, or highly material. If you cannot de- unwilling to cide the level of materiality from the given information, state the additional information that you would need to make a decision. c. Given your answers to 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 unmodified the appropriate report for each alternative materiality level): (i) Unqualified-standard wording cannot de- (ii) Unqualified-explanatory (iv) Qualified opinion only (v) Qualified scope and opinion a decision. paragraph (vi) Disclaimer om the fol- (iii) Unqualified-modified wording (vii) Adverse* art b., state d. Based on your answer to part c., indicate which paragraphs, if any, should be modi- fied in the standard audit report. Be sure to indicate whether an additional paragraph AAP is necessary, if so, where it should be located in the report. imitation *Based on AICPA question paper, American Institute of Certified Public Accountants. Chapter 3 / AUDIT REPORTS