GAAP Violation

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GAAP Violation

Review the following audit scenarios and recommend, with justifications, the appropriate

audit opinion to be issued in EACH scenario. You answer should state the type of audit

opinion to be issued and the justifications (reasons) for giving such an opinion.

I. The status of the client as a going concern is extremely doubtful. The problems are

properly described in the footnotes.

II. One of your client’s subsidiaries was audited by another audit firm, whose opinion

was qualified because of a GAAP violation. You do not believe that the GAAP

violation is material to the consolidated financial statements on which you are

expressing an opinion.

III. You are convinced that your client is violating another company’s patent in the

process of manufacturing its only product. The client will not disclose this because it

does not want to wave a red flag and bring this violation to the other company’s

attention. A preliminary estimate is that the royalty payments required would be

material to the financial statements.

IV. The client, with reasonable justification, has changed its method of accounting for

depreciation for all factory and office equipment. The effect of this change is not

material to the current-year financial statements but is likely to have a material effect

in future years. The client’s management will not disclose this change because of its

immaterial effect on the current-year statements. You have been unable to persuade

management to make the disclosure.

(16 marks)

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