Davis & Smith Finance Analysis Help With Solution

Part I. Fraudulent Financial Reporting

Davis & Smith, CPAs, have performed a variety of audit tests as part of their audit of Silva Inc. and must now evaluate their results. For each of the following situations, identify whether the selected balance (shown in parentheses) is overstated, understated, or fairly stated.

Situations

Effect on Financial Statement Item in parentheses (Overstated, Understated, or Fairly Stated)

1. One of Silva’s suppliers shipped goods to Silva on December 26, Year 1, FOB destination, with a scheduled arrival date of December 30, Year 1. The goods did not arrive at Silva’s receiving dock until January 2, Year 2. The goods were included in Silva’s ending inventory based on the scheduled arrival date of December 30. (inventory)

2. On December 31, a major customer of Silva’s requested a rush order of goods. Silva shipped the goods just before the close of business on the 31st, FOB shipping point. Silva did not include the goods in its year-end inventory balance. (inventory)

3. One of Silva’s customers is holding goods on consignment for Silva. The goods were delivered to the customer on December 31, Year 1. Silva has included the retail value of these goods in its sales for Year 1. (sales)

4. December 31, Year 1 falls on a Wednesday, but Silva pays its employees on Fridays. The payroll expense for the year includes all checks written through December 31. (expense)

5. On December 31, Silva sold goods to a related party. The goods were sold above Silva’s cost but below the normal retail value. (sales)

Part II. Audit Report (12 points)

In auditing the long-term investments account, Patrick, CPA, is unable to obtain audited financial statements for an investee located in a foreign country. Patrick concludes sufficient appropriate audit evidence regarding this investment cannot be obtained.

For each of the situations listed below, identify the appropriate opinion type and report modification by selecting from the options provided.

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Part III. Audit Opinion (6 points)

An entity has changed its depreciation method for production equipment from the straight line method to a units-of-production method based on hours of utilization. The entity’s auditor concurs with the change although it has a material effect on the comparability of the company’s financial statements.

1. Select those opinion types which can be used from the following.
A. Unqualified
B. “Except for” qualified
C. Adverse
D. Disclaimer

2. Select the appropriate report modification.

A. Issue the standard auditor’s report without modification

B. Modify the introductory paragraph

C. Modify the opinion paragraph

D. Add an explanatory (emphasis-of-matter) paragraph preceding the opinion paragraph

E. Add an explanatory (emphasis-of-matter) paragraph following the opinion paragraph

Part IV. Research

The audit of Joyful Company for the year ended September 30, 2013, is near completion. Your senior, David Meyers, at Tyler & Tyler CPAs, has asked you to draft the audit report, considering the following:

• During fiscal year 2013, Joyful Company changed its depreciation method. The engagement partner concurred with this change in accounting principle and its justification, and Meyers wants it properly reflected in the auditors’ report; the change is discussed in Note 7 to the financial statements.

• The 2013 financial statements are affected by an uncertainty concerning a lawsuit over patent infringement, the outcome of which cannot presently be estimated. Meyers has suggested the need for an explanatory paragraph in the auditors’ report related to this matter which is discussed in Note 4 to the financial statements.

• The financial statements for the year ended September 30, 2012, are to be presented for comparative purposes. Wilson & Wilson previously audited these statements and expressed a standard unqualified opinion.

Requirements:

Note: For each required research, please identify the source (e.g., AU### paragraph ##; or AS### paragraph ##) and also copy the appropriate paragraph(s).

1. Identify the paragraphs in the professional standards that provide guidance regarding the modification of the audit report for the change in accounting principle.

2. Identify the paragraph in professional standards that provides the guidance regarding the modification of the audit report for the uncertainty

3. Identify the paragraphs in the professional standards that provide the guidance regarding the effect of Wilson & Wilson’s opinion on the 2012 financial statements on Tyler & Tyler’s audit report on the 2013 financial statements.

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