1. The auditor’s opinion on the fairness of financial statements may be affected bysubsequent events.
•
•
Define what is commonly referred to in auditing as a subsequent event, and described
the two general types of subsequent events.
Identify those auditing procedures that the auditor should apply at or near the
completion of fieldwork to disclose significant subsequent events.
2. Linda Tanner, CPA is auditing the Carson Company. For the current year, Carson is
presenting December 31, 20X5, financial statements with comparative financial
statements for the year ended December 31, 20X4. In the prior audit, Linda identified an
understatement of prepaid expenses of $100,000 at December 31, 20X4, that was not
corrected. In the current year, Linda found that prepaid expenses were understated by
another $50,000 at December 31, 20X5.
•
•
•
Using the iron curtain approach, describe how Tanner would consider whether an
adjustment is required.
Using the rollover approach, describe how Tanner would consider whether an
adjustment is required.
Describe what SEC Staff Accounting Bulletin No. 108 requires in this situation.
3. While performing your audit of Williams Paper Company. You discover evidence that
indicates that Williams may not have the ability r=to continue as a going concern.
•
•
Discuss types of information that may indicate substantial doubt about a client’s ability
to remain a going concern.
Explain the auditor’s obligation in such situations.
4. For each of the following brief scenarios, assume that you are reporting on client
financial statements. Reply as to the types of opinion possible for the scenario. In
addition:
• Unless stated otherwise, assume that matter involved is material.
• If the problem does not state that a misstatement (or possible misstatement) is
pervasive, assume that it may or may not be pervasive 9thus, the appropriate reply may
include two possible reports.)
• Do not read more into the circumstance than what is presented.
Do not consider an auditor discretionary circumstance for modification of the audit report
unless the situation explicitly suggests that the auditors wish to emphasize a particular matter.
Report Types may be used once, more than once, or not at all.
Situation
a. Bowles Company is engaged in a hazardous
Report Types
1. Unmodified standard
report.
trade and has obtained insurance coverage
related to the hazard. Although the likelihood is remote,
a material portion of the company’s assets could be
destroyed by a serious accident.
b. Draves Company owns substantial properties that
2. Unmodified with an
Emphasis of matter
paragraph.
have appreciated significantly in value since the date
Of purchase. The properties were appraised and are
reported in the balance sheet at the appraised values
(which materially exceed costs) with related disclosures.
The CPA’S believe that the appraised values reported
In the balance sheet reasonably estimate the asset’s
Current values.
c. During the audit of Eagle Company, the a firm has
encountered a significant scope limitation relating to
inventory record availability and is unable to obtain
sufficient appropriate audit evidence in that area.
3. Qualified
d. London Company ha material investment in stocks of
4. Adverse
Subsidiary companies. Stocks of the subsidiary companies
are not actively traded in the market, and the CPA firm’s
engagement does not extend to any subsidiary company.
The CPA firm is able to determine that all investments
are carried at original cost, but has no real idea of market
value. Although the difference between costs and market
could be material, it could not have pervasive effect on the
overall financial statements.
e. Slade Company has material investments in stock of subsidiary
5. Disclaimer
companies. Stocks of the subsidiary companies are actively
traded in the market. Management insist that all investment
be carried at original costs, and the CPA firm is satisfies that
the original costs are accurate. The CPA firm believes that the
client will never ultimately realize a substantial portion of the
investments because the market value is much lower than the cost;
the client has fully disclosed the facts in notes to the financial statements.
6. Either qualified or
Adverse
7. Either qualified
Disclaimer
8. Either adverse
Or disclaimer
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