Maybe It Was, But We Weren't - Research Paper Example

?Auditing Research Paper for the "Maybe It Was, But We Weren't" Case EXECUTIVE SUMMARY This particular case, d as "Maybe It Was, But We Weren't", has been viewed to be associated with the engagement of CPAs of a company named Friday & Co for the purpose of auditing the financial statements of Johnson Company. One of the major facts of this particular case have been identified to be the inability of Friday in determining the validity as well as the viability of the financial statements belonging to Johnson Company resulting in the generation of several critical issues. Relating to this case, the determination of the reports issued by Friday as appropriate or otherwise, has been taken into concern as a primary objective of this paper. Moreover, the significant terms associated with auditing like ‘scope limitation’, ‘limited engagement and ‘piecemeal opinion’ have also been considered and related to the case in the discussion of this paper. Most significantly, how Friday should submit the auditor’s report to the Board of Directors as on its performance for the Year 3 and Year 2 from a comparative perspective has also been considered in the discussion of this paper. INTRODUCTION The perception of audit or auditing is principally described as a procedure of verifying and examining the accounting as well as financial records of a particular company. It has often been argued that the organizations belonging to this modern day context normally conducts auditing for the purpose of adding credibility to their respective financial statements resulting in analyzing along with recognizing the chief financial areas that are required to be enhanced. It has also been apparently observed in this regard that the modern organizations often attempt to prioritize auditing due to rising complexities particularly in the overall business or operational procedures and the decision-making systems (Gupta 1-2). In specific terms, the aim of this report is to analyze the approaches adopted and executed by the Certified Public Accountants (CPAs) appointed within Friday & Co (Friday) who are again bestowed with the sole responsibility of auditing the financial statements of Johnson Company. It has been viewed in this similar concern that the CPAs have audited the financial records or the statements of Johnson Company and duly expressed a sort of incompetent opinion on the balance sheet only, deciphering a degree of negligence when considering other forms of financial statements. In this regard, a balance sheet depicts a financial statement which recapitulates liabilities, shareholder’s equity and assets among others with respect to a particular company. It is often regarded as a condensed financial record or a statement that portrays the monetary position of a business entity on a specific date. The other forms of financial statements might generally embrace an income statement along with a cash-flow statement, statement concerning retained earnings as well as profit and loss statement among others (Nelson 193-194). According to the case, it has been apparently observed that the CPAs of Friday had expressed an unqualified opinion on the balance sheet of Johnson Company as on December 31, Year 2. Specially mentioning, Friday did not note the inclusion of the physical inventory as of December 31, Year 1, on the grounds that the transaction took place prior to the appointment of auditors. However, the report indicates certain critical issues or aspects related with auditing concerns. For instance, the first aspect was mainly concerned on the reason owing to which the opinion was issued only on the balance sheet as on Year 2. The second aspect that has been recognized in this context had been concerned about judging whether the issuance of an unqualified opinion by the CPAs of Friday, only for year 2 was appropriate. If otherwise, what are the suitable ways of disclosing or reporting the case? Finally, the other critical issue that has been viewed to appear in this case scenario was concerned with the fact that is it suitable for Friday to issue relative financial statements to Johnson Company particularly for years 2 and 3. THESIS STATEMENT This particular report intends to analyze whether the reports issued by Friday were appropriate on ethical as well as on technical grounds. Moreover, the paper also discusses the significant terms like “taken as a whole”, “piecemeal opinion” and the reporting situation associated with the case concerning “Maybe It Was – But We Weren’t” relate to the fourth standard of reporting as well as inadequate disclosure. Various aspects like analyzing the situation described with respect to December 31 as on Year 2, the financial statement represented a “scope limitation” or a “limited engagement”. The paper also renders a few recommendations on how should the auditor’s report be submitted to Johnson’s Board of Directors on the Year 3 and 2 relative financial statements. ARE THE REPORTS ISSUED BY FRIDAY APPROPRIATE OR ARE THERE OTHER ALTERNATIVES Relating to the case, it has been apparently observed that the CPAs of Friday have audited the financial statements of Johnson Company and conveyed an ill-equipped opinion on the balance sheet presented as on the company’s transaction for the Year 2. One of the apparent discrepancies observed in the auditing report was that Friday neglected the inclusion of physical inventory as of December 31, Year 1, stating the grounds that the transaction date was before to the appointment of the auditors. In this regard, it has been viewed that Friday was unable to satisfy itself concerning inventory by means of applying certain other procedures. Thus, on the basis of the above discussion, it can be affirmed that the reports which were issued by the auditors or the CPAs of Friday were not appropriate to the utmost degree. This can be justified by analyzing certain important aspects linked with the procedure of accounting. From the viewpoint of conveying an unqualified opinion particularly focusing upon the balance sheet constructed for the year 2, it can be stated that the primary reason for conducting this activity was that Friday lacked in terms of its capability to examine the inclusion of physical inventory. This might be owing to the reason that the company also lacked in performing effective communication involving its clients or the auditors at that particular time period. It is worth mentioning that the expression of an unqualified opinion upon any specific subject matter and not observing the inclusion of physical inventory can be related to the misunderstanding with respect to the Accounting Standards (ASs) following the section 331.09. According to the guidelines of this particular section, the matters concerning the expression of an unqualified opinion and the inclusion of the physical inventory must be discussed by a company to its respective appointed auditors or CPAs (American Institute of Certified Public Accountants, Inc., “Standards”). According to the case, though the CPAs of Friday have uttered an unqualified opinion on the balance sheet of Johnson neglecting the inclusion of the physical inventory, the reports that were issued by Friday can be stated as inappropriate. With this similar concern, there exist certain alternatives through which, the reports that were issued by Friday might be reconstructed with greater accuracy resulting in depicting effective analysis of financial records or statements at large. As an alternative measure, the reports which were issued by Friday must have considered the guidelines as specified in Section 331.09. In accordance with the effectual guidelines that have been mentioned in Section 331.09, Friday should focus on ascertaining whether the conditions are expected to authorize a sufficient audit along with articulation of an unqualified opinion. Moreover, if the company does not desire to ascertain the aforementioned aspect, it must discuss with the auditors or the CPAs concerning the probable inevitability for a ‘qualified opinion’ or ‘disclaimer of opinion’. It has been apparently observed in this similar background that the audit limitations present in such circumstances can be resolved or mitigated effectively by following certain particular alternatives. For instance, the inclusion of physical inventory can be delayed or another physical inventory can be duly taken into concern which the CPAs or the auditors can observe effortlessly (American Institute of Certified Public Accountants, Inc., “Standards”). Comprehensively, these alternatives can be strategically followed by Friday with the motive of constructing the reports as issued by the company to be much appropriate as well as precise. HOW DO THE TERMS “TAKEN AS A WHOLE”, “PIECEMEAL OPINION” AND THE REPORTING SITUATION DESCRIBED ABOVE RELATE TO THE FOURTH STANDARD OF REPORITNG AND INADEQUATE DISCLOSURE The term “taken as a whole”, describes the prime intention of the fourth standard concerning reporting and inadequate disclosure of finances to restrict the misapprehension of the level of accountability that the auditors assume when they are associated with assessing as well as recording financial records or statements. Relating to this significant intention of the fourth standard, according to Section 508, it has been viewed that the term “taken as a whole” generally pertains uniformly to an entire set of financial statements and also to a specific financial statement presented for a particular period(s). According to the approach of “taken as a whole”, the report of the auditors has been viewed to be normally issued in association with the fundamental financial statements belonging to a definite business entity. In this regard, the different sorts of financial statements typically comprise income statement, cash-flow statement, income statement and statement concerning retained earnings among others. Additionally, in accordance with the principles concerning the fourth standard of reporting and inadequate disclosure, the term “taken as a whole” represents that the auditors or the CPAs must present the aforesaid different sorts of financial statements belonging to any business entity, with due significance to fairness in compliance with the Generally Accepted Accounting Principles (GAAP) (AICPA, “Reports on Audited Financial Statements”). GAAP is fundamentally regarded as a compilation of normally followed standards as well as rules relating to accounting that are followed effectively for reporting different financial statements. The prime intention of GAAP has been viewed to ensure that the conduct of financial reporting is much apparent along with consistent by a greater extent (Bragg, “Interpretation and Application of Generally Accepted Accounting Principles”). As the term “taken as a whole” emphasizes upon complying with GAAP while conducting financial reporting, the approach can be related with the fourth standard of reporting and inadequate disclosure in presenting auditing report which can further be useful for Friday’s CPAs. In the similar context, the term “piecemeal opinion” has been principally viewed as based on the assessment of the auditors concerning the accuracy or the precision of a certain portion of the different financial statements belonging to a particular company. It has been apparently observed that a CPA or an auditor might deliver a ‘piecemeal opinion’ at any situation wherein there does not exist complete information relating to any aspect of the financial dealings performed by a company. In this similar context, after acquiring a brief idea about the description presented by GAAP, it can be affirmed that the notion concerning the guidelines do not permit the CPAs or the auditors to deliver ‘piecemeal opinions’. This can be owing to the reason that GAAP is viewed to consider certain relevant standards or rules that must be followed while conducting better as well as effective financial reporting (AICPA, “Reports on Audited Financial Statements”). Relating to the case, the reports that have been issued by Friday possessed certain limitations which restricted its appropriateness owing to the non-assimilation of complete information. This is due to the reason that the CPAs audited the financial statements of Johnson for the year ended December 31 as on Year 2 by expressing an unqualified opinion particularly on the balance sheet, however including the information in other financial statements; thus, causing a discrepancy in the accuracy of the financial statements. The other financial statements might comprise income as well as retained-earnings statement, cash flow and income statement. Apart from expressing an unqualified opinion on the balance sheet, it has also been viewed that Friday neglected the inclusion of the physical inventory as of December 31 of Year 1. As the reports that were issued by Friday were lacked in terms of accuracy and appropriateness, it can be affirmed that the CPAs of Friday can deliver a ‘piecemeal opinion’ when performing financial reporting. Additionally, as the term concerning “piecemeal opinion” typically focuses upon evaluating the accuracy of a certain part of the financial statements belonging to any company, it can be related to the fourth standard of reporting and inadequate disclosure at large. It can also be affirmed from a broader perspective that the reporting situation which has been described in the case of “Maybe It Was – But We Weren’t” can be related to the fourth standard of reporting and inadequate disclosure. This can be further justified with reference to the fact that the fourth standard of reporting guideline signifies that an auditor or a CPA ought to either express a relevant as well as a logical opinion concerning the viability of the financial statements by acquiring complete information, or affirm that an opinion cannot be expressed especially in the auditor’s report along with rational justifications. It has been apparently observed in this regard that if an auditor or a CPA fails to express a valid along with a sensible opinion, the sole responsibility shall bestow upon the CPAs engaged (AICPA, “Reports on Audited Financial Statements”). Thus, on the basis of the above discussion, it can be affirmed that as the CPAs of Friday have audited the financial statements of Johnson and expressed an unqualified opinion in the balance sheet, it can be related to the fourth standard with regard to reporting and inadequate disclosure by a considerable extent. DOES THE SITUATION DESCRIBED WITH RESPECT TO THE DECEMBER 31, YEAR 2, FINANCIAL STATEMENTS REPRESENT A “SCOPE LIMITATION” OR A “LIMITED ENGAGEMENT” Prior to judging the situation that has been mentioned in the case “Maybe It Was – But We Weren’t” representing a “scope limitation” or a “limited engagement”, the situation must be discussed briefly to obtain a comprehensive idea. According to the case, it has been viewed that the CPAs appointed in Friday audited the financial statements of Johnson for the year ended December 31 for Year 2 with an unqualified opinion in the balance sheet while constructing other financial statements appropriately, thus causing a major discrepancy in the reporting accuracy. Stating precisely, the company lacked in observing the inclusion of the physical inventory dated December 31 on Year 1 into the financial statements dated December 31 of Year 2 owing to the reason that the date was prior to the appointment of the selected auditors. In this similar concern, the facet concerning “scope limitation” denotes that an auditor should focus on conducting suitable auditing process by following as well as conducting effectual audit systems for the purpose of affording a kind of rational basis and thereon, articulating an opinion concerning the viability of the financial statements. It has been viewed that there pertain crucial factors which impose crucial restrictions upon the inculcation of “scope limitation”. The critical factors comprise the incapability to acquire adequate relevant audit evidence, insufficiency in accounting records and timing of the audit work. These factors might support the CPAs or the auditors to qualify their respective opinions or to disclaim a particular opinion. It can be affirmed in this similar context that the auditors or the CPAs ought to consider in expressing or disclaiming opinions because of the prevalence of “scope limitation” if audit evidence with regard to an uncertainty exists but is not accessible to them. According to section 508.62, the appropriateness of disclaiming an opinion lies at the time when “scope limitation” of an audit is not adequate enough towards facilitating the auditors or the CPAs to form an opinion concerning the viability of the financial statements. Most vitally, the section also demonstrates that when there lays the appropriateness of disclaiming an opinion, the auditors or the CPAs ought to affirm the entire substantive causes for the disclaimer in a separate paragraph(s). Contextually, it has been observed that the auditors or the CPAs must take into concern certain imperative aspects at the time when disclaiming an opinion due to the existence of “scope limitation”. These aspects mainly comprise disclosing any sort of material change concerning the viability of the financial statements by designing an explanatory paragraph without contradicting the opinion disclaimer on the financial reporting in terms of expressing pessimistic assurance (Thomson Reuters, “Auditor’s Reports”). Relating to the case of “Maybe It Was – But We Weren’t”, it can be stated that the situation which has been described in the case concerning December 31, Year 2 represents a “scope limitation” or a “limited engagement” apparently. This can be justified with reference to the fact that the CPAs of Friday were asked to conduct a full audit of the financial statements as a whole by Johnson Company. Though, the CPAs belonging to Friday possessed the incapability to issue an opinion particularly on the financial reports or statements as a whole, the situation can be represented as a “scope limitation”. Moreover, the situation relating to the case of “Maybe It Was – But We Weren’t” can be associated with the significant concern of “scope limitation” as the CPAs of Friday have expressed an unqualified opinion on the balance sheet and also did not consider the inclusion of the physical inventory dated December 31 on Year 1 with due significance. Apart from representing the situation that was presented in the case of “Maybe It Was – But We Weren’t” as a “scope limitation”, it is to be affirmed that the situation can also be represented as a “limited engagement”. In this similar concern, it has been apparently observed that the auditors or the CPAs often engages in a “limited engagement” or a “limited assurance” with the purpose of executing their individual professional judgment in verifying the methods that are quite indispensable to acquire the evidence needed for conducting accurate financial reporting. It is worth mentioning that the auditors or the CPAs often take certain vital factors into concern while engaging in a “limited engagement” or a “limited assurance” engagement. In this regard, the chief factors comprise nature as well as the size of a business, the number of transactions that are performed by a company while conducting business, the rising level of complexities especially in the business procedure and the degree of uncertainty or error which prevails in a business (AICPA, “Reports on Audited Financial Statements”). With regard to the case of “Maybe It Was – But We Weren’t”, it is to be stated that the situation described in the case with respect to December 31, Year 2 relating to the financial statements indicates the occurrences of a “limited engagement” or a “limited assurance engagement”. This can be justified with reference to the fact that the financial statements audited by the CPAs of Friday for Johnson Company expressed an unqualified opinion particularly upon the balance sheet representing the occurrence of “scope limitation”. As the facet of “scope limitation” exists in the financial statements that were audited by the CPAs of Friday of Johnson Company, it can be stated from a broader perspective that the situation relating to the case with respect to December 31 on Year 2 represents a “limited engagement”. It is worth mentioning in this similar circumstance that in accordance with Section 623.14, the significant concern of “limited engagement” or a “limited assurance” engagement is appropriate at the time during the existence of “scope limitation” (AICPA, “Reports on Audited Financial Statements”). HOW SHOULD THE AUDITOR’S REPORT SUBMITTED TO JOHNSON’S BOARD OF DIRECTORS ON THE YEAR 3 AND YEAR 2 COMPARATIVE FINANCIAL STATEMENTS READ According to the case, it has been apparently observed that the CPAs belonging to Friday have audited the financial statements belonging to Johnson by expressing upon an unqualified opinion particularly on the balance sheet for the year ended December 31 of Year 2. Moreover, it has also been viewed that the CPAs of Friday failed to observe the inclusion of the physical inventory for the year ended December 31, Year 1. However, the company uttered an unqualified opinion on all the financial statements apart from articulating opinion on balance sheet for the year ended December 31, Year 3 by incorporating the standards as well as the rules of GAAP. According to Section 508, it is the prime responsibility of Friday to express similar opinion on all the financial statements for various years to mitigate discrepancies in the reporting. Notably, the section also represents that the CPAs or the auditors must report concerning their opinion on the financial statements with regard to prior years’ individual financial statement. In order to determine about how the reports of the auditors or the CPAs are to be submitted to the Board of Directors of Johnson Company, it can be observed that the company issued a ‘piecemeal opinion’ for the Year 2, updating the presented opinion by incorporating the standards along with the rules concerning GAAP. Thus, it is to be affirmed that this particular information needs to be stated in the report at the time of recording the financial statements in accordance with the guidance which has been mentioned in Section 508.69 (AICPA, “Reports on Audited Financial Statements”). With reference to the case, it has been viewed that Friday had expressed an incompetent opinion on all the fundamental financial statements for the year ended December 31 of Year 3 by incorporating the principles of GAAP. In this similar concern, one of the major disparities that can be observed concerning the auditing of the financial statements is expressing an unqualified opinion. Precisely, it can be affirmed from a broader perspective that for the year ended December 31, Year 2, Friday expressed an unqualified opinion particularly on the balance sheet, whereas, for the year ended December 31, Year 3, the company expressed an similar opinion on all the financial statements by incorporating the guiding principles of GAAP. From the standpoint of submitting the auditor’s report to the Board of Directors in Johnson after its appropriate reconstruction, it can be stated that Friday needs to adopt or follow and execute certain significant procedures. These procedures comprise presenting the relative financial statements with a clean opinion for Year 3, delivering an updated opinion possessing disclaimer of opinion especially for the transactions performed in the Year 2 and finally portraying a clear disclosure that year 2 was unaudited as the expression of an unqualified opinion has been made in the balance sheet only. Moreover, it is also to be stated that the auditors or the CPAs belonging to Friday need to depict a clear disclosure that Year 2 was unaudited because the company did not observed the inclusion of the physical inventory and was unable to satisfy itself regarding the significant concern of inventory by means of employing other finance related procedures. Thus, by considering the aforesaid ways or techniques, the auditor’s report must be re-submitted to the Board of Directors in Johnson Company for the Year 3 and Year 2 comparative financial statements. CONCLUSION From the overall analysis, it can be comprehended that proper conduct of financial reporting plays a decisive role in supporting different organizations to adopt as well as to execute effective decisions linked with any financial matter. Relating to the case concerning “Maybe It Was – But We Weren’t”, certain critical issues can be duly observed. By considering the issues, it can be affirmed from a broader perspective that appropriate reporting techniques or procedures must be made with due significant to transparency and accuracy at the time when dealing with certain significant aspects. The important aspects might comprise ‘piecemeal opinions’, ‘scope limitations’, ‘limited engagement’ and ‘inclusion of physical inventory’ among others. Relating to the case, it has been viewed that Friday articulated an unqualified opinion particularly on the balance sheet of Johnson. However, appropriate techniques or procedures of financial reporting have been viewed to be expressing opinions upon all the aforesaid forms of the financial statements by a considerable level. It is worth mentioning in this regard that in order to submit the auditor’s report to the Board of Directors in Johnson, Friday needs to adopt as well as to execute certain important approaches. The approaches might comprise delivering an updated opinion possessing disclaimer of opinion, presenting the relative financial statements with a clean opinion and most vitally, portraying an unambiguous disclosure concerning the viability of the financial statements. Works Cited Bragg, Steven M. Wiley GAAP 2012: Interpretation and Application of Generally Accepted Accounting Principles. United States: John Wiley & Sons, 2011. Print. Gupta, Kamal. Contemporary Auditing. India: Tata McGraw-Hill Education, 2004. Print. Nelson, Stephen L. QuickBooks Simple Start for Dummies. United States: John Wiley & Sons, 2011. Print. “Reports on Audited Financial Statements”. Research. AICPA. Web. n.d. < http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00508.pdf> “Standards”. Auditing. American Institute of Certified Public Accountants, Inc. Web. 10 May 2013. < http://pcaobus.org/Standards/Auditing/Pages/AU310.aspx> Thomson Reuters. “Auditor’s Reports”. 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