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University of Waterloo AFM 202- Class 11 Learning Activities with solutions

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AFM 202 Class 11: Audit Opinions Learning Activities Learning Objectives  Describe the key elements of a standard unmodified auditor’s report  Describe the types of modified opinions an auditor may provide and explain the conditions under which each type would be issued  Select and justify the type of auditor’s opinion to issue Before Class  Read the Audit Opinion Reading  Complete problems #1 and #3 attached  Complete Requirements 1, 2, 6, and 7 for the Surfer Dude Duds case in the Courseware package After Class AFM 202 Class 11: Audit Opinions Learning Activities Problem #1 Required For each of the following situations, indicate what type of audit opinion, if any, is most appropriate and why. a) There is a scope limitation and it is material. However, the overall financial statements are still presented fairly. b) There is a departure from GAAP and it is pervasively material. c) The auditor lacks independence in fact, but not necessarily in appearance. d) The uncorrected misstatements are immaterial. Solution a) Modified with a qualification. The financial statements are fairly stated “Except for” the one area where SAAE could not be gathered. This did not impact the financial statements overall. b) Modified with an adverse opinion. There is a GAAP departure significant enough that the overall financial statements are not in accordance with GAAP. c) Modified with a disclaimer of opinion. Because the auditor is not independent, no opinion should be issued. In fact, due to the independence issue, the engagement should not have been accepted. d) Unmodified. The misstatements found would not be considered significant enough to impact a user’s decisions, so the FS are presented fairly in all material respects. Problem #2 Katrina Lukacs is the engagement partner of the audit of Champion Securities, an investment company. Most of Champion's assets and liabilities are financial and their valuation is critical to the assessment of the company's solvency and profitability. Katrina has employed two outside experts to value the financial assets and liabilities because they are extremely complex to value, particularly the energy market derivatives and the instruments traded in foreign markets. In addition, the valuations are highly dependent on market conditions and the specific and detailed requirements of the recently revised accounting standards. Throughout this year's audit, Katrina has had difficulties with the CEO of Champion securities. He is vehemently opposed to any asset writedowns she has suggested. The CEO has the backing of the chair of the board and Katrina has been unable to get the CEO to listen to her concerns about the valuations of the financial assets and liabilities the company has made. In past years, Katrina has had an amicable relationship with both the CEO and the chair and the audits have run very smoothly. Katrina has now realized that this harmonious relationship was mainly due to

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