Name

ACC614: Auditing & Fraud Detection (FSI2247A)

Ashford University

January 3, 2023

Week 6 – Assignment: Various Reporting Situations

Assume that Stanford CPAs encountered the following issues during various audit engagements in 2020:

1. Stanford conducted the audit of Luck, a new client this past year. Last year, Luck was audited by another CPA, who issued an unmodified opinion on its financial statements. Luck is presenting financial statements for 2019 and 2020 in comparative form.

The best way for Stanford to handle the situation is to just mention their thoughts on the matter in the Opinion part of the financial statements for the year 2020. A statement to the effect that the previous auditor’s view has not been changed should be included in the auditor’s report under the heading “other matters.”

1. One of Stanford’s clients is RealCo, a real estate holding company. Assume that RealCo experienced a significant decline in the value of its investment properties during the past year because of the downturn in the economy and has appropriately recognized that decline in market value under GAAP. Stanford wished to emphasize the decline in the economy and its impact on Real Co’s financial position and results of operations for 2020 in its audit report.

The fall in value of the investment properties is undeniably significant, and this fact ought to be represented in the financial statements as well as reported by the auditor. Moreover, the auditor ought to be aware of this decline. This reduction is critical to the accuracy of the users' understanding of the financial information. As a consequence of this, an explanation of the subject matter paragraph is required.

1. For the past five years, Stanford has conducted the audits of TechTime, a company that provides technology consulting services, and has always issued unmodified opinions on its financial statements. Based on its 2020 audit, Stanford believes that an unmodified opinion is appropriate; however, Stanford did note that TechTime reported its third consecutive operating loss and has experienced negative cash flows because of the inability of some of its customers to promptly pay for services received.

The CPAs at Stanford need to include a paragraph titled “Emphasis on the topic.” A thing that is adequately incorporated in the financial statements and is of such significance that it is important to the user’s understanding of financial statements is referred to as an emphasis­of­matter paragraph. In this particular instance, the user’s comprehension of the financial statements is greatly enhanced by the presence of a third straight operational loss as well as negative cash flows. The current situation is relevant to the going business, and if the issue at hand is significant but not all­encompassing, an emphasis on the matter paragraph will do the trick. A disclaimer of view is necessary, however, in the event that the materiality and pervasiveness of the issue are both significant.

1. Stanford has assisted Cardinal Inc. with the preparation of its financial statements but has not audited, compiled, or reviewed those financial statements. Cardinal wished to include these financial statements in a communication that would describe Stanford’s involvement in the preparation of the financial statements. Stanford believes that Cardinal’s communication is adequate and appropriately describes Stanford’s limited role in the preparation of the financial statements.

The present case is not pertaining to an audit situation. Here C Inc is engaging Stanford CPAs for the preparation of the financial statements. In an ordinary situation, the same is the responsibility of the management and not the auditors. Hence any such communication will not come within the ambit of the regular auditing laws.

1. Trees Inc. presents summary financial information along with its financial statements. The summary financial information has been derived from the complete set of financial statements that Stanford has audited (and issued an unmodified opinion on the complete financial statements). A lender has engaged Stanford to evaluate and report on Trees’ summary financial information. Stanford believes that summary financial information is fairly stated in relation to Trees’ complete financial statements.

When an auditor is required to provide an account of summary financial statements, rather than giving their opinion, they will demonstrate whether the data in the summary financial statements is authentically expressed in all material regards corresponding to the total financial statements. An auditor is only allowed to provide an opinion after they have examined the complete financial statements. In the current scenario, certified public accountants from Stanford have informed the lending institutions in an appropriate manner that the summary financial information is stated accurately in connection to the Tree’s comprehensive financial statements.

1. Stanford believes that some of the verbiage in Plunkett’s Management Discussion & Analysis section is inconsistent with the firm’s financial statements. Stanford has concluded that Plunkett’s financial statements present its financial position, results of operations, and cash flows in accordance with GAAP and has decided to issue an unmodified opinion on Plunkett’s financial statements.

In this particular instance, the accountants at Stanford should include an other­matter paragraph in order to provide an explanation for the discrepancy that exists with the company’s financial statements. The “other­matter” paragraph discusses topics that are not included in the financial statements but are pertinent to the user’s comprehension of the audit, the auditor’s obligation, or his report. These topics include: This is an example of some of the information that is included alongside the financial statements. The choice made by Stanford CPA to issue an opinion that is unmodified is the correct one. Although situations like these are not covered by auditors' opinions, it is the auditors' responsibility to determine whether or not the information provided is consistent with the audited financial statements.

1. Oil Patch is a client in the energy industry that is required to present supplementary oil and gas reserve information. Stanford has performed certain procedures regarding this information and concluded that it is presented in accordance with the Financial Accounting Standards Board (FASB) presentation guidelines and does not appear to depart from GAAP. Based on the audit, Stanford plans to issue an unmodified opinion on Oil Patch’s financial statements.

When organizations are asked to give supplementary information, auditors may expand their report to include an other­matter paragraph that outlines the methods conducted, highlights any difficulties connected to this material, and specifies the supplementary information. In this particular instance, Stanford has carried out a number of procedures and has determined that there are no problems relating to the information; hence, Stanford ought to offer an opinion that is unaltered regarding Oil Patch’s financial accounts.