Part I For each of the following independent situations, indicate the type of nancial statement audit report that you would issue and briey explain your reasoning. Assume that each item is at least material. 1. Bareeld Corporation, a wholly owned subsidiary of Sandy, Inc, is audited by another CPA rm. As the auditor of Sandy, Inc., you have assured yourself of the other CPA rm's mdependence and professional reputation. However, you are unwilling to take complete responsibility for its audit work. The management of Bonner Corporation has decided to exclude the statement of cash ows from its nancial statements because it believes that its bankers do not nd the statement to be very useful. . You are auditing Diverse Carbon, a manufacturer of nerve gas for the military, for the year ended September 30. On September 1, one of its manufacturing plants caught fire, releasing nerve gas into the surrounding area. Two thousand people were killed and numerous others paralyzed. The company's legal cmmseljndicates that the company is liable and that the amount of the liability can be reasonably estimated, but the company refuses to disclose this information in the nancial statements. During your audit of Win, Coal Company, the controller, Tracy Tricks, refuses to allow you to conrm accounts receivable because she is concerned about complaints from her customers. You are unable to satisfy yourself about accounts receivable by other audit procedures and you are concerned about Tracy's true motives. On January 31, (353$, Toy Manufacturing hired your rm to audit the company's financial statements for the prior year. You were unable to observe the client's inventory on December 31. However, you were able to satisfy yourself about the inventory balance using other auditing procedures. Gelato Bros, Inc, leases its manufacturing facility from a partnership controlled by the chief executive ofcer and major shareholder of Gelato. Your review of the lease indicates that the rental terms are in excess of rental terms for similar buildings in the area. The company refuses to disclose this relatedparty transaction in the footnotes. Johnstone Manufacturing Company has used the doubledeclining balance method to depreciate its machinery. During the current year, management switched to the 10. 11. 12. 13. 14. |_ straightline method because it felt that it better represented the utilization of the assets. You concur with its decision. All information is adequately disclosed inthe financial statements. Thibodeau Mines, Inc. uses LIFO for valuing inventories held in the United States and FIFO for inventories produced and held in its foreign operations. Walker Computers is suing your client, Super Soware, for royalties over patent in'ingement. Super Software's outside legal counsel assures you, and you agree, that 1Walker's case is completely without merit. Super Software docs not disclose any contingency relating to the case. In prior years, Worcester Wool Mills has used current market prices to value its inventory of raw wool (which is not in accordance with GAAP). During the current year, Worcester changed to FIFO for valuing raw wool. Upon review of the recent history of the lives of its specialized service trucks, Gas Leak Technology justiably changed the service lives for depreciation purposes on its trucks from ve years to three years. This change resulted in a material amount of additional depreciation expense. During the audit of Brannon Bakery Equipment, you found that a material amount of inventory had been excluded 'om the company's nancial statements. After discussing this problem with management, you become convinced that it was an unintentional oversight. Management appropriately corrected the error prior to your finalization of eld work Jay Rich, CPA, holds 10 percent of the stock inRothenburg Construction Company. The board of directors of Rothenburg asks Rich to conduct its audit. Rich completes the audit and determines that the nancial statements present fairly in accordance with generally accepted accounting principles. Rarnamoorthi Savings and Loan's financial condition has been deteriorating for the last ve years. Most of its problems result from loans made to real estate developers in Saint Johnsl County. Your review of the loan portfolio indicates that there should be a major increase in the loanloss reserve. Based on your calculations, the proposed write down of the loans will put Ramamoorthi into violation of the state's capital requirements. The client reises to make the adjustment or to disclose the possible going concern issue in the notes to the financial statements. Part II The following auditor's report was drafted by a staff accountant of Nathan and Matthew, CPAs, at the completion of the audit of the comparative financial statements of Monterey for the years ended December 31, 2018 and 2017. The report was submitted to the engagement partner, who reviewed matters thoroughly and properly concluded that an unmodified opinion should be expressed. The draft of the report prepared by an inexperienced staff auditor is as follows: Auditor's Report We have audited the accompanying financial statements of Monterey, which comprise the statements of assets, liabilities, and capital as of December 31, 2018, and the related statement of revenue and expenses for the year then ended, and the related notes to the financial statements. We conducted our audit in accordance with standards established by the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material mis-statement of the financial statements, whether due to fraud or error. An audit also includes evaluating the appropriateness of accounting policies used as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all mate-rial respects, the assets, liabilities, and owners' equity of Monterey as of December 31, 2018, and its revenue and expenses for the year then ended in conformity with generally accepted accounting principles applied on a consistent basis. Critical Audit Matters There were no critical audit matters. Nathan and Matthew, CPAs April 3, 2019 Identify the errors and omissions in the auditor's report as drafted by the staff auditor