The following are independent situations for which you will recommend an appropriate audit report:
1. Subsequent to the date of the financial statements as part of his post-financial report 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 won't be reimbursed by insurance. The newspapers described the event in detail. The financial statements and appended notes as prepared by management didn't 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 separated cities. The public accountant wasn't able to count the substantial undeposited cash receipts at the close of business on the last day of the financial 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. He was satisfied as to the cutoff of cash receipts by the use of the alternative procedure.
3. On 2 January 20X0, Retail Auto Parts Company Ltd received a notice from its primary supplier that, effective immediately, all wholesale prices would be increased by 10%. On the basis of the notice, Retail Auto Parts revalued its 31 December 20X9 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 profit. The increase in valuation is adequately disclosed in the footnotes.
4. e-Lotions.com.au is an online retailer of body lotions and other bath and body supplies. The company records revenue 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 determines that the amount of orders placed but not shipped as of the financial report date isn't material.
5. For the past five years, a public accountant has audited the financial statements of a manufacturing company. During this period, the examination scope was limited by the client as to the observation of the annual physical inventory. As the public accountant considered the inventories to be of material amount and she wasn't able to satisfy herself by other auditing procedures, she wasn't able to express an unmodified opinion on the financial statements in each of the five years.
The public accountant was allowed to observe physical inventories for the current year ended 31 December 20X0 because the client's banker would no longer accept the audit reports. In the interests of economy, the client requested the auditor not to extend her audit procedures to the inventory as of 1 January 20X0.
6. During the course of his examination of the financial statements of a company, an auditor is refused permission to inspect the minute books. The company secretary instead offers to give the auditor a certified copy of all resolutions and actions relating to accounting matters.
7. A public accountant has completed an examination of the financial statements of a bus company for the year ended 31 December 20X0. Prior to 20X0, the company had been depreciating its buses over a 10-year period. During 20X0, the company determined that a more realistic estimated life for its buses was 12 years and calculated the 20X0 depreciation on the basis of the revised estimate. The public accountant is satisfied that the 12-year life is reasonable.
The company has adequately disclosed the change in estimated useful lives of its buses and the effect of the change on 20X0 profit in a note to the financial statements.
REQUIRED
a. For each situation, identify whether each of the three conditions requiring a deviation from an unmodified opinion is applicable.
b. State the appropriate audit report from the following alternatives:
(1) Unmodified
(2) Unmodified-emphasis of matter
(3) Qualified
(4) Disclaimer
(5) Adverse.