audit reports

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