Accounting

CH 3 Exercise - Use the accompanying solution sheet to reply to the eight situations below that relate to the audit of financial statements of nonpublic companies. Unless indicated otherwise, assume that material amounts are involved. Do not consider including an emphasis of matter paragraph in an "auditor discretionary" circumstance.

Situations:

1. A company has departed from GAAP.

2. A company's inventory records were deficient and the auditor was required to satisfy herself that the inventory was properly stated using alternative procedures. She is satisfied that she has sufficient appropriate evidence.

3. In auditing a client, an auditor has determined that substantial doubt exists about an entity's ability to continue as a going concern.

4. A group auditor decides not to take responsibility for the work of the component auditor who audited a 70% owned subsidiary and issued an unmodified opinion. The total assets and revenues of the subsidiary are 5% and 8%, respectively, of the total assets and revenues of the entity being audited.

5. A company changes from FIFO to LIFO for inventory valuation and the auditor concurs with the change. The change has a material effect on the comparability of the entity's financial statements this year, but is expected to have an immaterial effect in the future.

6. Inadequate record retention policies by the client have resulted in a situation in which a CPA is unable to obtain sufficient appropriate audit evidence with respect to a material account.

7. A CPA has decided to emphasize in the audit report that the company she audited is a component of XYZ Company, its parent.

8. A client has changed its estimate of likely doubtful accounts from 2% of credit sales to 3%. The auditor believes the change to be reasonable.

Reply as to the type of opinion and other modification to the audit report as follows:

If more than one type of opinion is appropriate list each—one with "Report 1" and one with "Report 2." If...