TBS 2 Flashcards
Perry & Price, CPAs, audited the consolidated financial statements of Bond Company for the year ended December 31, 20X3, and expressed an adverse opinion because Bond carried its plant and equipment at appraisal values, and provided for depreciation on the basis of such values.
Perry & Price also audited Bond’s financial statements for the year ended December 31, 20X4. These consolidated financial statements are being presented on a comparative basis with those of the prior year and an unqualified opinion is being expressed.
Smith, the engagement supervisor, instructed Adler, an assistant on the engagement, to draft the auditor’s report on May 3, 20X5, the date of completion of the fieldwork. In drafting the report below, Adler considered the following:
Bond recently changed its method of accounting for plant and equipment and restated its 20X3 consolidated financial statements to conform with GAAP. Consequently, the CPA firm’s present opinion on those statements is different (unqualified) from the opinion expressed on May 12, 20X4.
Larkin & Lake, CPAs, audited the financial statements of BX, Inc., a consolidated subsidiary of Bond, for the year ended December 31, 20X4. The subsidiary’s financial statements reflected total assets and revenues of 2% and 3%, respectively, of the consolidated totals. Larkin & Lake expressed an unqualified opinion and furnished Perry & Price with a copy of the auditor’s report. Perry & Price has decided to assume responsibility for the work of Larkin & Lake insofar as it relates to the expression of an opinion on the consolidated financial statements taken as a whole.
Bond is a defendant in a lawsuit alleging patent infringement. This is adequately disclosed in the notes to Bond’s financial statements, but no provision for liability has been recorded because the ultimate outcome of the litigation cannot presently be determined.
Auditor’s Report
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of Bond Company, which comprise the consolidated balance sheets of Bond Company and subsidiaries as of December 31, 20X4 and 20X3, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. An audit also includes evaluating the appropriateness of accounting policies used by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence that we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bond Company and subsidiaries as of December 31, 20X4 and 20X3, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America except for the change in accounting principles with which we concur and the uncertainty, which is discussed in the following explanatory paragraph.
Emphasis of Matter
In our previous report, we expressed an opinion that the 20X3 financial statements did not fairly present financial position, results of operations, and cash flows in conformity with generally accepted accounting principles because the Company carried its plant and equipment at appraisal values and provided for depreciation on the basis of such values. As described in Note 12, the Company has changed its method of accounting for these items and restated its 20X3 financial statements to conform with generally accepted accounting principles. Accordingly, our present opinion on the 20X3 financial statements, as presented herein, is different from that expressed in our previous report.
Emphasis of Matter
The Company is a defendant in a lawsuit alleging infringement of certain patent rights. The Company has filed a counteraction, and preliminary hearings and discovery proceedings are in progress. The ultimate outcome of the litigation cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication has been made in the accompanying financial statements.
Perry & Price, CPAs May 3, 20X5
Smith reviewed Adler’s draft and indicated in the Supervisor’s Review Notes below that there were deficiencies in Adler’s draft, below are the the deficiencies noted by Smith. For each deficiency, indicate whether Smith is correct or incorrect in the criticism of Adler’s draft.
The report is improperly titled.
All the basic financial statements are not properly identified in the introductory paragraph
There is no reference to the American Institute of Certified Public Accountants in the introductory paragraph.
Larkin & Lake are not identified in the introductory and opinion paragraphs.
The subsidiary, BX Inc., is not identified and the magnitude of BX’s financial statements is not disclosed in the introductory paragraph.
The report does not state in the auditor’s responsibility paragraph that generally accepted auditing standards require analytical procedures to be performed in planning an audit.
The report does not state in the auditor’s responsibility paragraph that an audit includes assessing the internal control structure.
The report does not state in the auditor’s responsibility paragraph that an audit includes assessing significant estimates made by management.
The date of the previous report (May 12, 20X4) is not disclosed in the first explanatory paragraph.
It is inappropriate to disclose in the first explanatory paragraph the circumstances that caused Perry & Price to express a different opinion on the 20X3 financial statements.
The concurrence with the accounting change is inappropriate in the opinion paragraph.
Reference to the (litigation) uncertainty should not be made in the opinion paragraph.
Bond’s disclosure of the (litigation) uncertainty in the notes to the financial statements is not referred to in the second explanatory paragraph.
The letter of inquiry to Bond’s lawyer concerning litigation, claims, and assessments is not referred to in the second explanatory paragraph.
The report is not dual dated, but it should be because of the change of opinion on the 20X3 financial statements.
