The following are independent situations for which you will recommend an appropriate auditor's report. For each situation, using the framework for reporting decisions, identify the appropriate audit report from the list below and briefly explain a rationale for selecting the report.
(1) Unqualified-standard wording.
(2) Unqualified-explanatory paragraph.
(3) Qualified opinion-inappropriate accounting policy or material misstatement.
(4) Qualified opinion-scope limitation.
(5) Disclaimer.
(6) Adverse.
1. Subsequent to the date of the financial statements as part of the post-balance sheet date audit procedures, a public accountant learned of heavy damage to one of a client's two plants due to a recent fire; the loss will not be reimbursed by insurance. The newspapers described the event in detail.
The financial statements and appended notes as prepared by the client do not disclose the loss caused by the fire.
2. A public accountant is engaged in the examination of the financial statements of a large manufacturing company with branch offices in many widely separate cities. The public accountant was not able to count the substantial undeposited cash receipts at the close of business on the last day of the fiscal year at all branch offices. As an alternative to this auditing procedure used to verify the accurate cutoff of cash receipts, the public accountant observed that deposits in transit as shown on the year-end bank reconciliation appeared as credits on the bank statement on the first business day of the new year. The public accountant was satisfied as to the cutoff of cash receipts by the use of the alternative procedure.
3. On January 2, 2016, the Retail Auto Parts Company Limited received a notice from its primary supplier that effective immediately all wholesale prices would be increased by 10 percent. On the basis of the notice, Retail Auto Parts revalued its December 31, 2015, inventory to reflect the higher costs. The inventory constituted a material proportion of total assets; however, the effect of the revaluation was material to current assets but not to total assets or net income. The increase in valuation is adequately disclosed in the footnotes.
4. E-lotions.com Inc. is an online retailer of body lotions and other bath and body supplies. The company records revenues at the time customer orders are placed on the website, rather than when the goods are shipped, which is usually two days after the order is placed. The auditor determined that the amount of orders placed but not shipped as of the balance sheet date is not material.
5. During the course of the examination of the financial statements of a corporation for the purpose of expressing an opinion on the statements, a public accountant is refused permission to inspect the minute books. The corporate secretary instead offers to give the public accountant a certified copy of all resolutions and actions relating to accounting matters.
6. For the past five years, a CPA has audited the financial statements of a manufacturing company. The company applies the ASPE framework to its financial statements. During this period, the audit scope was limited by the client as to the observation of the annual physical inventory. Because the CPA considered the inventories to be material and he was not able to satisfy himself by other auditing procedures, he was unable to express an unqualified opinion on the financial statements in each of the five years. The CPA was allowed to observe physical inventories for the current year ended December 31, 2016, because the client's banker would no longer accept the audit reports. However, to minimize audit fees, the client requested that the CPA not extend his audit procedures to the inventory as of the beginning of the year, January 1, 2016.