You are the auditor of Glaxoa Corporation (Glaxoa) for the current year. For each situation:
1. Describe the corrections, if any, you would propose to management to make the financial statements conform to GAAP.
2. Identify the type of opinion you would issue if management refused to make your proposed changes along with any effects on your audit report.
3. Provide a brief (one to three sentences) reason for your decision.
EXAMPLE
You found that Glaxoa incorrectly included the value of a large accounts receivable account twice in its financial statements by incorrectly recording the related sale twice. The amount of the account was material. You found no other material misstatements or encountered any significant problems in conducting the audit.
Proposed Corrections to the Financial Statements:AJE to reduce Accounts Receivable and Sales for the unsupported amount
Type of Opinion if Management Refuses to Make Proposed Corrections:
Modified Opinion - Qualified with basis for modification paragraph
Reason(s):The misstatement was material but was not pervasive. The financial statements, while materially misstated, were not so misleading as to not present fairly in conformity with GAAP.
Situation 1
You completed your audit of Glaxoa and found no material misstatements. You encountered no significant problems in conducting the audit.
Proposed Corrections to the Financial Statements:
Type of Opinion if Management Refuses to Make Proposed Corrections:
Reason(s):
Situation 2
You found that Glaxoa had changed its accounting principles relating to its cost flow method for inventory from LIFO to FIFO this year. Glaxoa did not disclose the change in the notes to the financial statements. You determined the impact of the change in accounting principles was material with respect to the financial statements. Upon further inquiry and testing, you determined the change was justified and that both methods are consistent with GAAP. You found no material misstatements or encountered any significant problems in conducting the audit.
Proposed Corrections to the Financial Statements:
Type of Opinion if Management Refuses to Make Proposed Corrections:
Reason(s):
Situation 3
You were unable to obtain sufficient, appropriate evidence about the value of Glaxoa's investment in a foreign business because audited financial statements for that business were not available. The investment amount was material to Glaxoa's financial statements. You found no material misstatements or encountered any significant problems in conducting the audit.
Proposed Corrections to the Financial Statements:
Type of Opinion if Management Refuses to Make Proposed Corrections:
Reason(s):
Situation 4
You found that Glaxoa had a material notes receivable due from Glaxoa's Chief Executive Officer that was properly disclosed in the financial statement footnotes in accordance with GAAP. You decide additional disclosure should be made because of the significance of the asset. You found no material misstatements or encountered any significant problems in conducting the audit.
Proposed Corrections to the Financial Statements:
Type of Opinion if Management Refuses to Make Proposed Corrections:
Reason(s):
Situation 5
You found that Glaxoa used an accounting principle for its cost flow method related to inventory that was not consistent with GAAP. Glaxoa disclosed the accounting principle in the notes to the financial statements. You determined the impact on the financial statements was material. Upon further inquiry and testing, you determined the departure from GAAP was justified because following GAAP in Glaxoa's unique situation would have resulted in misleading financial statements. You found no material misstatements or encountered any significant problems in conducting the audit.
Proposed Corrections to the Financial Statements:
Type of Opinion if Management Refuses to Make Proposed Corrections:
reason(s):
Situation 6
You found that Glaxoa failed to properly expense general repairs and maintenance costs related to its plant and equipment assets. Glaxoa improperly capitalized those costs causing both assets and net income for the year to be overstated by a material amount. You also found an unrecorded liability resulting from civil litigation. Glaxoa's legal counsel had concluded that the potential loss was both probable as of the balance sheet date and the amount of the loss could be reasonably estimated. The amount of the estimated loss was material to the financial statements. The total effect on the financial statements of the misstatements and non-disclosures was both material and pervasive. You found no other material misstatements or encountered any significant problems in conducting the audit.
Proposed Corrections to the Financial Statements:
Type of Opinion if Management Refuses to Make Proposed Corrections:
Reason(s):
Situation 7
You found that Glaxoa had a material notes receivable due from Glaxoa's Chief Executive Officer that was only disclosed as a Notes Receivable on the balance sheet. You also found a material unrecorded liability resulting from civil litigation. Glaxoa's legal counsel had concluded that the potential loss was both reasonably possible as of the balance sheet date and the amount of the loss could be reasonably estimated. The total effect on the financial statements of the non-disclosures was both material and pervasive. You found no other material misstatements or encountered any significant problems in conducting the audit.
Proposed Corrections to the Financial Statements:ype of Opinion if Management Refuses to Make Proposed Corrections:
reason(s):
Situation 8
You found that Glaxoa failed to properly expense general repairs and maintenance costs related to its plant and equipment assets. Glaxoa improperly capitalized those costs causing both assets and net income for the year to be overstated by a material amount. You also found an unrecorded liability resulting from civil litigation. Glaxoa's legal counsel had concluded that the potential loss was both reasonably possible as of the balance sheet date and the amount of the loss could be reasonably estimated. The amount of the estimated loss was material to the financial statements. The total effect on the financial statements of the misstatements and non-disclosures was material. You found no other material misstatements or encountered any significant problems in conducting the audit.
proposed Corrections to the Financial Statements:
Type of Opinion if Management Refuses to Make Proposed Corrections:
Reason(s):
Situation 9
Glaxoa's management refused to allow you observe the taking of physical inventory at two of its main warehouse citing concerns that company trade secrets might be revealed. The value of inventory held at those two locations was material to the financial statements. You found no material misstatements or encountered any other significant problems in conducting the audit.Proposed Corrections to the Financial Statements:
Type of Opinion if Management Refuses to Make Proposed Corrections:
Reason(s):
Situation 10
You found that Glaxoa failed to properly expense general repairs and maintenance costs related to its plant and equipment assets. Glaxoa improperly capitalized those costs causing both assets and net income for the year to be overstated by a material amount. You found no other material misstatements or encountered any significant problems in conducting the audit.
Proposed Corrections to the Financial Statements:Type of Opinion if Management Refuses to Make Proposed Corrections:
Reason(s):
Situation 11
You found that Glaxoa had changed its accounting principles relating to its cost flow method for inventory from LIFO to a method based on current fair market value (FMV) this year. You determined the impact of the change in accounting methods was a material increase in the value of inventory reported on the financial statements. Upon further inquiry and research, you determined that Glaxoa's use of FMV was not consistent with GAAP. You found no other material misstatements or encountered any significant problems in conducting the audit.Proposed Corrections to the Financial Statements:Type of Opinion if Management Refuses to Make Proposed Corrections:
Reason(s):