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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.
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:
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.
11-4 Solutions Manual - Principles of Auditing and Other Assurance Services
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]
We have audited the statement of assets, liabilities, and capital (income tax [cash] basis) of
Vanda & Corona, a partnership, as of December 31, 2004, and the related statements of
revenue and expenses (income tax [cash] basis) and statement of changes in partners’
capital accounts (income tax [cash] basis) for the year then ended. 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.
We conducted our audits in accordance with generally accepted auditing standards. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note X, the partnership’s policy is to prepare its financial statements on the
accounting basis used for income tax purposes; consequently, certain revenue and related
assets are recognized when received rather than when earned, and certain expenses are
recognized when paid rather than when the obligation is incurred. Accordingly, the
accompanying financial statements are not intended to present financial position and results
of operations in conformity with generally accepted accounting principles.