Assignment:
For the following independent situations, assume that you are the audit partner on the engagement:
1. During your audit of Debold.com, Inc. you conclude that there is a possibility that inventory is materially overstated. The client refuses to allow you to expand the scope of your audit sufficiently to verify whether the balance is actually misstated.
2. Four weeks after the year-end date, a major customer of Prince Construction Co. declared bankruptcy. Because the customer had confirmed the balance due to Prince at the balance sheet date, management refuses to charge off the account or otherwise disclose the information. The receivable represents approximately 10% of accounts receivable and 20% of net earnings before taxes.
3. You complete the audit of Johnson Department Store, and in your opinion, the financial statements are fairly presented. On the last day of the audit, you discover that one of your supervisors assigned to the audit has a material investment in Johnson.
4. Auto Delivery Company has a fleet of several delivery trucks. In the past, Auto Delivery had followed the policy of purchasing all equipment. In the current year, they decided to lease the trucks. The method of accounting for the trucks is therefore changed to lease capitalization. This change in policy is fully disclosed in footnotes.
5. You are auditing Woodcolst Linen Services ford the first time. Woodcolst has been in business for several years but has never had an audit before. After the audit is completed, you conclude that the current year balance sheet is stated correctly in accordance with GAAP. The client did not authorize you to do test work for any of the previous years.
6. You were engaged to audit the Cutter Steel Company's financial statements after the close of the corporation's fiscal year. Because you were not engaged until after the balance sheet date, you were not able to physically observe inventory, which is highly material. On the completion of your audit, you are satisfied that Cutter's financial statements are presented fairly, including inventory about which you were able to satisfy yourself by the use of alternative audit procedures.
For each situation, do the following:
a. Identify which of the conditions requiring a modification of or a deviation from an unqualified standard report is applicable.
b. State the level of materiality as immaterial, material, or highly material. If you cannot decide the level of materiality, state the additional information needed to make a decision.
c. Given your answers in parts a and b, sate the type of audit report that should be issued. If you have not decided on level of materiality in part b, state the appropriate report for each alternative materiality level.