3-25 (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: 1. Auto Delivery Company has a fleet of several delivery trucks. In the past, Auto Delivery had followed the policy of purchasing all equipment. In the current year, they decided to lease the trucks. The method of accounting for the trucks is therefore changed to lease capitalization. This change in policy is fully disclosed in footnotes. 2. You are auditing Deep Clean Services for the first time. Deep Clean has been in busi- ness for several years but over the last two years has struggled to stay afloat given the economic conditions. Based on your audit work, you have substantial doubt that Deep Clean will be in business by the end of its next fiscal year. 3. One of your audit clients has a material investment in a privately held biosciences company. Your audit firm engaged a business valuation specialist to assist in evaluat- ing the client's estimation of the investment's fair value. You conclude that the valua- tion specialist's work provides sufficient appropriate audit evidence. 4. Four weeks after the year-end date, a major customer of Prince Construction Co. declared bankruptcy. Because the customer had confirmed the balance due to Prince uses to charge off the account or otherwise presents approximately 10% of accounts you conclude that there is a possibility ent refuses to allow you to expand the Whether the balance is actually misstated. at the balance sheet date, management refuses to charge off the accou disclose the information. The receivable re receivable and 20% of net earnings before taxes. 5. During your audit of Raceway.com, Inc., you conclude that there is that inventory is materially overstated. The client refuses to allow you to scope of your audit sufficiently to verify whether the balance is actually 6. You complete the audit of Munich Department Store, and in your opinion cial statements are fairly presented. On the last day of the audit, you discov of your supervisors assigned to the audit has a material investment in Munich. 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 cannou decide the level of materiality, state the additional information needed to make a decision. c. Given your answers in parts a. and b., state the type of audit report that should be is- sued. If you have not decided on one level of materiality in part b., state the appropri- ate report for each alternative materiality level. Required
