Standards Based Decision Making Team C June 24, 2012 ETH 376 Professor Standards Based Decision Making Green and Associates is the CPA firm retained by the ABC Corporation to handle their external auditing duties. The auditing team at Green and Associates took time to review aspects of ABC’s finances and had some questions regarding their client’s monthly statements that made them a little uneasy. Items such as their inventory valuation methods not to mention, Green’s new client will not submit to an audit of internal financial controls.
With all of the issues that Green and Associates are encountering the four types of auditor’s opinions, if their inventory valuation methods are legal and supported by GAAP, and if ABC’s refusal to permit an internal controls audit is within federal law need to be investigated. Lastly, an opinion must be written to address the situation and detail the ethical problems involved for both ABC and Green and Associates. The four types of opinions auditors use to quantify a statement of opinion regarding a completed financial audit are; unqualified, unqualified with an explanatory paragraph, qualified, and adverse.
An unqualified opinion is the most desired from an auditor because it means an auditor regards the financial statements as being “clean”, and they fairly represent the financial condition of a company. Auditors must plan for audits and examine materials which give an auditor sufficient information for understanding and knowledge of a company to perform tests of information within financial statements to determine materiality, adherence to GAAP. An example of an unqualified audit is: To the Board of Directors and Shareholders Company AAA Address
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We have audited the accompanying balance sheets and the related statements of income, retained earnings, and cash flows of AAA Company as of December 31, XXXX, and XXXX. The company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits. Our audits conducted in accordance with auditing standards generally accepted in the United States of America. Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly and materially the financial position of AAA Company as of December 31, XXXX and XXXX, the results of its operations and cash flows conform to accounting principles generally accepted in the United States of America.
Signature Date Unqualified audits that contain an explanatory paragraph are given when an auditor thinks there is a matter that deems mention in the audit because an issue in the company statements needs to be addressed by the management, board of directors, and auditing committee. In this case the auditor is giving the company notification of a something that should be addressed. An example of an explanatory paragraph in an unqualified opinion is as follows: As noted in note 1, the company has changed valuation of inventory from first in first out (FIFO) to last in first out (LIFO).
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Management’s plans in regard to this change are included in note 1. The financial statements do not include adjustments that may be a result of this change. A qualified opinion is given when the auditor questions applications of accounting principles in financial statements and an outcome of materiality is not able to be established. An illustration of a qualified opinion follows: The Company has excluded debt in the accompanying balance sheets that in our opinion should be included to conform to accounting principles generally accepted in the United States.
If these long-term debts were included, expenses would increase by $500,000 retained earnings and net income would decrease by $250,000 as of December 31, XXXX. In our opinion, except for the effects of not including this increased debt as discussed in the preceding paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of AAA Company as of December 31, XXXX, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.
An adverse audit opinion is given when the auditor thinks the financial statements do not fairly represent the financial condition of a company. Furthermore, there may be a question about the application of GAAP in those statements. An example of an adverse opinion is: The company has excluded debt and expenses in the balance sheets that would increase debt by $1,000,000 and expenses of $1,000,000 that would decrease retained earnings by $1,000,000 and net income by $1,000,000 as of December 31, XXXX.
In our opinion, the effects the matters mentioned in the previous paragraph, the financial statements do not fairly present the financial position in accordance with generally accepted accounting principles (GAAP) of Company AAA as of December 31, XXXX. ABC Corporation Inventory Valuation Method Change ABC Corporation has changed the inventory valuation method from FIFO to LIFO since the last audit. ABC Corporation is legally allowed to change inventory valuation methods if a company deems it is advantageous to do so.
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GAAP has been followed by ABC Corporation because they have included the change in financial statements and informed the auditor about the reasons for doing so. As long as the company reports the change of valuation to the required authorities and shareholders, this is a legally acceptable practice. According to Chron. com, companies will change the method of inventory valuation methods to defer taxes if the method makes inventory a part of expenses, which is not taxed in the same manner (Jane, 2012).
ABC Corporation’s CFO feels that Green and Associates does not need to perform an audit of the firm’s internal controls over financial reporting. Federal law does not require that ABC Corporation has one performed, and the CFO may very well be aware of this and may be why he refuses to have done. Sarbanes-Oxley does not require that a firm have one a specific audit of internal controls over financial reporting done. Provisions within the Sarbanes-Oxley only require that ABC submit financial records with an opinion by an auditing firm.
It is the responsibility of ABC Corporation and management to prepare and verify the information contained in the financial statements presented for audit review, accompanied by supporting evidence. Green and Associates, the auditor, is responsible to assess the fairness and accuracy of the financial statements and render an opinion regarding the reasonable fairness of said statements. Green and Associates is satisfied that the financial statements are a fair representation of company operations with the exception of the change of inventory valuations from FIFO to LIFO for the current, and consequently, the prior reporting periods.
ABC Corporation intends to resume inventory valuations of FIFO starting in the following reporting period. According to GAAP, this is not acceptable practice. However, it may be acceptable for ABC to continue the FIFO valuation method for annual reporting purposes and use the LIFO reporting method for taxation purposes, as this is the reasoning given by management for the change in inventory valuation methods. Green and Associates is not able to assess the effectiveness of current internal control processes being used by ABC Corporation in accordance with SOX section 404, because of lack of cooperation by company management.
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Considering the facts that the previous auditor was discharged, the change of inventory valuations for the current reporting period and the following reporting period which, in the opinion of the auditor, represents an issue of materiality, plus we cannot assess internal control functions, Green and Associates is entering a qualified opinion regarding the fairness of the financial statements. It is important for ABC Corporation to maintain a level of ethicality concerning its internal controls, audits, and business dealings.
It is important for Green and Associates to report accurately any financial findings according to the Sarbanes-Oxley Act. It is also necessary for both organizations to be on board with the information in the financial reporting for ABC Corporation. As Green and Associates I would challenge the ethics of ABC Corporation as its auditor to maintain the accountability and responsibility that Green and Associates have built a reputation on.
It will be important for Green and Associates to disclose in the SEC filings that there was a change in the status of FIFO to LIFO and why it was done. ABC Corporation ethically should be more proactive in allowing Green and Associates to do a separate audit over the organizations internal controls, not allowing Green and Associates to perform this task makes ABC Corporation appear to be hiding something.
On an ethical level it is important for Green and Associates to report all financial activity accurately and for ABC Corporation to take the time to audit internal control because activity may be different from what the CFO knows. CONCLUSION References Jane, M. (2012).
Why do companies change inventory valuation? Retrieved June 24, 2012 from //smallbusiness. chron. com/companies-change-inventory-valuation-12446. html Mintz, S. M. , & Morris, R. E. (2011).
Ethical obligations and decision making in accounting. (2nd ed. ).
New York, NY: McGraw-Hill/Irwin.