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

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




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After Class




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 Complete problems #2, #4, and #5 attached.




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, 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




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area where SAAE could not be gathered. This did not impact the financial statements overall.




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b) Modified with an adverse opinion. There is a GAAP departure significant enough that the
overall financial statements are not in accordance with GAAP.




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c) Modified with a disclaimer of opinion. Because the auditor is not independent, no opinion
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should be issued. In fact, due to the independence issue, the engagement should not have
been accepted.
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d) Unmodified. The misstatements found would not be considered significant enough to impact
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a user’s decisions, so the FS are presented fairly in all material respects.
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Problem #2
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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
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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
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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.
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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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