Chapter 29 Ans
Chapter 29 Ans
Chapter 29 Ans
I. Review Questions
1. The report simply states: “The financial statements are not intended to be
presented in conformity with generally accepted accounting principles.” The
opinion expression thereafter refers to a description of the comprehensive basis
used.
2. The following are four comprehensive bases of accounting other than GAAP:
1. A basis of accounting to comply with the requirements of a governmental
regulatory agency (for example, insurance companies use a basis of
accounting pursuant to the rules of the insurance commission)
2. A basis of accounting used to file an income tax return
3. The cash receipts and disbursements basis of accounting (cash basis) and
modifications to the cash basis, such as recording depreciation on fixed
assets or accruing income tax.
4. A definite set of criteria having substantial support that is applied to all
material items in the financial statements, such as the price-level basis of
accounting.
29-2 Solutions Manual - Principles of Auditing and Other Assurance
Services
3. A CPA may be asked to report on the application of GAAP by another auditor’s
client who disagrees with the auditor’s view of proper accounting for the
transaction. Auditing standards apply when a CPA in public practice, either in
connection with a proposal to obtain a new client or otherwise, provides oral or
written advice on the application of accounting principles to a specific
transaction or the type of opinion that may be rendered on an entity’s financial
statements. In forming a judgment, the CPA should perform the following
procedures:
• Obtain an understanding of the form and substance of the
transaction(s).
• Review applicable GAAP.
• If appropriate, consult with other professionals or experts.
• If appropriate, perform research or other procedures to ascertain and
consider the existence of creditable precedents or analogies.
• The reporting CPA is required to consult with an entity’s continuing
CPA to ascertain all the relevant facts. The continuing CPA can
provide information about the form and substance of the transaction,
how management has applied accounting principles to similar
transactions, and whether the method of accounting recommended by
the continuing CPA is disputed by management.
Prior-year statements were unaudited: The auditor should label the prior-year
columns “Unaudited” and modify the report by adding a paragraph that
disclaims an opinion on the statements.
1. b 5. b 9. a 13. d 17. b
2. a 6. a 10. a 14. a 18. c
3. c 7. a 11. d 15. a 19. b
4. a 8. a 12. d 16. a 20. a
Case 1.
To the Board of Directors of Neiny Ltd.:
We have reviewed the accompanying balance sheet of Neiny Ltd. as of
December 31, 2004, and the related statements of income,
retained earnings, and cash flows for the year then ended, in
accordance with standards established by the Auditing Standards
and Practices Council. All information included in these financial
statements is the representation of the management of Neiny Ltd.
A review consists principally of inquiries of company personnel and
analytical procedures applied to financial data. It is substantially
less in scope than an examination in accordance with generally
accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying 2004 financial
statements in order for them to be in conformity with generally
accepted accounting principles.
The financial statements for the year ended December 31, 2003, were
audited by us, and we expressed an unqualified opinion on them in
our report dated February 27, 2004, but we have not performed
any auditing procedures since that date.
Case 2. a. The assertions that are incorrect and should otherwise be deleted are the
following:
29-4 Solutions Manual - Principles of Auditing and Other Assurance
Services
1. Report should be addressed to Ms. Clean Corporation’s Board of
Directors.
2. Delete the entire paragraph describing the scope except for the
reference to cash in banks and accounts receivable.
3. Delete the opinion rendered on cash in banks and accounts receivable.
4. Delete the recommendation to acquire Ajacks.
b. The assertions that are missing and should be inserted are the following:
1. Date of the report.
2. Statement limiting the distribution of the report to Ms. Clean’s
management.
3. Description of the procedures performed.
4. Statement that the agreed-upon procedures applied are not adequate to
constitute a GAAS audit.
5. Description of the accountant’s findings.
6. Disclaimer of an opinion concerning cash in banks and accounts
receivable.
7. Statement limiting the report only to cash in banks and accounts
receivable and indicating that the report does not extend to the
financials taken as a whole.
Case 3.
Independent Auditor’s Report
[Addressee]