Simulation Qu 17-33 (Static) [LO17-3, 17-4]

Johnson & Barkley, CPAs, audited the consolidated financial statements of Jordan Company (a public company) for the year ended December 31, 20X7. Johnson & Barkley previously have audited and issued unqualified audit reports on Jordan Companys financial statements for the preceding 7 years (beginning in 20X0). The 20X7 consolidated financial statements are being presented on a comparative basis (two years for the balance sheet, three years for the other statements) and an unqualified opinion is being expressed. Smith, the engagement supervisor, instructed Abler, an assistant on the engagement, to draft the auditors report. In drafting the report below, Abler considered the following:

• Jordan changed its method of accounting for inventory from LIFO to FIFO in 20X7.
• Jordan is a defendant in a lawsuit alleging patent infringement. This is adequately disclosed in the notes to Jordans financial statements, but no provision for liability has been recorded because the ultimate outcome of the litigation cannot presently be determined.

Abler drafted the following audit report:

Report of Independent Registered Public Accounting Firm (Point 1)

To Jordan Company and its shareholders (Point 2)

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Jordan Company (the Company) as of December 31, 20X7 and 20X6, the related statements of income, comprehensive income, stockholders equity, and cash flows, for each of the three years in the period ended December 31, 20X7, and the related notes [and schedules] (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20X7 and 20X6, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20X7, in conformity with accounting principles generally accepted in the United States of America. As indicated in the next paragraph, the Company has a change in Accounting Principles in 20X7. (Point 3)

Change in Accounting Principles

As discussed in Note 2 to the consolidated financial statements, the Company adopted the first-in-first-out method of inventory valuation in 20X7. (Point 4)

Basis for Opinion

(Point 5) Our responsibility is to express an opinion on the Companys financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. (Point 6) Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters (Point 7)

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to management (Point 8) and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

[Assume critical audit matters properly described]

Johnson & Barkley, CPAs

We have served as the Companys auditor since 20X0. (Point 9)

Los Angeles, California

December 31, 20X8 (Point 10)

Required:

Smith reviewed Ablers draft and stated in the Supervisors Review Notes below that there were deficiencies in Ablers draft. Items 1 through 10 represent the deficiencies noted by Smith. For each deficiency, indicate whether Smith is correct or incorrect in the criticism of Ablers draft.

Items Deficiencies Report Types 1. The reports title is incorrect as it should not include the word independent. 2. The report also must be addressed to the board of directors. 3. The change in accounting principles should not be referred to in the opinion paragraphdelete that sentence. 4. The Change in Accounting Principles paragraph should include the dollar effect of the change. 5. The Basis for Opinion section should begin with a statement that the financial statements are the responsibility of management. 6. The sentence should state generally accepted auditing standards of the PCAOB. 7. When critical matters exist, the two related paragraphs (this and the following paragraph) should immediately follow the opinion paragraph. 8. The point should say communicated to the audit committee. 9. This disclosure also must include the name of the engagement partner. 10. The report should be dated as of February 12, the date on which sufficient appropriate audit evidence was obtained.