audit reports
audit reports
audit reports
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(1) Unqualified—standard wording<br />
(2) Unqualified—explanatory paragraph<br />
(3) Unqualified—modified wording<br />
(4) Qualified opinion only<br />
(5) Qualified scope and opinion<br />
(6) Disclaimer<br />
(7) Adverse*<br />
3-31 (Objective 3-4) Various types of “accounting changes” can affect the second reporting<br />
standard of the generally accepted <strong>audit</strong>ing standards. This standard reads, “The report<br />
shall identify those circumstances in which such principles have not been consistently<br />
observed in the current period in relation to the preceding period.’’ Assume that the<br />
following list describes changes that have a material effect on a client’s financial statements<br />
for the current year:<br />
1. Correction of a mathematical error in inventory pricing made in a prior period.<br />
2. A change from prime costing to full absorption costing for inventory valuation.<br />
3. A change from presentation of statements of individual companies to presentation<br />
of consolidated statements.<br />
4. A change from deferring and amortizing preproduction costs to recording such costs<br />
as an expense when incurred because future benefits of the costs have become<br />
doubtful. The new accounting method was adopted in recognition of the change in<br />
estimated future benefits.<br />
5. A change from the completed-contract method to the percentage-of-completion<br />
method of accounting for long-term construction contracts.<br />
6. A change in the estimated useful life of previously recorded fixed assets based on<br />
newly acquired information<br />
7. A change to including the employer share of Social Security (FICA) taxes as<br />
“retirement benefits” on the income statement from including it with “other taxes.’’<br />
8. A change from the FIFO method of inventory pricing to the LIFO method of<br />
inventory pricing.<br />
Identify the type of change described in each item above, and state whether any modi -<br />
fication is required in the <strong>audit</strong>or’s report as it relates to the second standard of reporting.<br />
Organize your answer sheet as shown. For example, a change from the LIFO method of<br />
inventory pricing to the FIFO method of inventory pricing would appear as shown.<br />
Assume that each item is material.*<br />
Should Auditor’s<br />
Item No. Type of Change Report Be Modified?<br />
Required<br />
Example An accounting change from one generally accepted Yes<br />
accounting principle to another generally accepted<br />
accounting principle<br />
3-32 (Objective 3-7) The following is an <strong>audit</strong> report, except for the opinion paragraph, of<br />
Tri-Nation Coin Investments.<br />
INDEPENDENT AUDITOR’S REPORT<br />
To the Board of Directors and Stockholders, Tri-Nation Coin Investments, Phila -<br />
delphia, Pennsylvania<br />
We have <strong>audit</strong>ed the accompanying consolidated balance sheet of Tri-Nation Coin<br />
Investments and subsidiaries as of July 31, 2007, and the related statements of income,<br />
stockholders’ equity, and cash flows for the year then ended and the related schedules<br />
listed in the accompanying index. These financial statements are the responsibility of<br />
the Company’s management. Our responsibility is to express an opinion on these<br />
financial statements based on our <strong>audit</strong>s.<br />
*AICPA adapted.<br />
CHAPTER 3 / AUDIT REPORTS 73