Satisfaction

Introduction

Objectives of the Report:

Every Study has some Objectives. On doing a course of “Audit & Inspection of Banks” we have to learn a lot of auditing and inspecting tools & techniques. This Study has been undertaken with the following Objectives:

» To get an overall idea about the auditing procedure.

» Gathering practical knowledge about auditing by solving Cases.

» Finding out the appropriate opinion for each of the cases.

»Finally generate an idea about the real scenario of how the audit firms use this policies to provide their opinions regarding the conditions.

Methodology of the Study:

For the purpose of the solution of the cases, all the data and information we have been collected from the secondary (direct) sources. We have used different types of Secondary Data. In this Report we have to make extensive effort For the collection of the data. Again in order to make proper analysis regarding those cases we have to acquire some basis knowledge about auditing and preparation of audit report. we also took help from our text book “AUDITING-an integrated approach”.

Rationality:

Being students of business administration we have to go through all the branches of business and its related matters. our duty is not only to learn what these are but also their applications. “Audit and inspection of banks ” is one of the courses we are learning. This course provides us with the knowledge of the auditing activities and decision of an auditor about its service provided to financial statements. As it is a very important term & our course teacher assigned us so therefore we have prepared a report based on Case Analysis.

Scope of the report:

This report provides some special scopes to analyze and monitor the overall audit quality of the banks provided to its clients’ reports. Data gathered through this report can be used for a variety of purposes:

Limitations of the report:

This report is based on the solution of the cases from the book. So the whole work is limited to the chapter about the Audit Reports. But the implication of the learning is so pervasive.

What is Audit?

The word 'Audit' is originated from the Latin word 'audire' which means 'to hear'. In the earlier days, whenever there is suspected fraud in a business organization, the owner of the business would appoint a person to check the accounts and hear the explanations given by the person responsible for keeping the account and funds. In those days, the audit is done to find out whether the payments and receipt are properly accounted or not.

Some useful definition of Auditing

➢ Auditing is a systematic examination of the books and records of a business or the organization in order to ascertain or verify and to report upon the facts regarding the financial operation and the result thereof.

➢ An audit may be said to be such an examination of the books, accounts and vouchers of a business as well enable the auditor to satisfy that the Balance Sheet is properly drawn up, so as to give a true and fair view of the state of affairs of the business and whether the Profit or Loss for the financial period according to the best of his information and the explanations given to him and as shown by the books, and if not, in what respect he is not satisfied

➢ An audit is an examination of accounting records undertaken with a view to establishing whether they correctly and completely reflect the transactions to which they relate. In some instances, it may be necessary to ascertain whether the transactions themselves are supported by authority.

It is clear from the above definitions that auditing is the systematic and scientific examination of the books of a accounts and records of a business so as to enable the auditor to satisfy himself that the Balance Sheet and the Profit and Loss Account are properly drawn up so as to exhibit a true and fair view of the financial state of affairs of the business and profit or loss for the financial period. The Auditor will have to go through various books and accounts and related evidence to satisfy him about the accuracy and authenticity to report the financial health of the business.

Objective of Audit

For a better understanding we could classify the objective of audit as:

1. Primary Objectives

2. Secondary Objectives

Primary Objectives: To determine and judge the reliability of the financial statement and the supporting accounting records of a particular financial period is the main purpose of the audit. As per the Indian Companies Act, 1956 it is mandatory for the organizations to appoint a auditor who, after the examination and verification of the books of account, disclose his opinion that whether the audited books of accounts, Profit and Loss Account and Balance Sheet are showing the true and fair view of the state of affairs of the company's business. To get a true and fair view of the company’s affairs and express his opinion, he has to thoroughly check all the transactions and relevant documents of the company made during the audited period. This will help the auditor to report the financial condition and working result of the organization. While carrying out the process of audit, the auditor may come across certain errors and frauds. But detection of fraud or errors is not the primary objective of the audit. They are come under the secondary objectives of audit.

Secondary Objectives: In order to report the financial condition of the business, auditor has to examine the books of accounts and the relevant documents. In that process he may come across some errors and frauds. We may classify these errors and frauds as below:

• Detection and prevention of Errors

• Detection and prevention of Frauds.

Advantages of Auditing

It is compulsory for all the organizations registered under the companies act must be audited. There are advantages in auditing the accounts even when there is no legal obligation for doing so. Some of the advantages are listed below:

➢ Audited accounts are readily accepted in Government authorities like income Tax Dept., Sales Tax dept., Land Revenue departments, banks etc.

➢ By auditing the accounts Errors and frauds can be detected and rectified in time.

➢ Audited accounts carry greater authority than the accounts which have not been audited.

➢ For obtaining loan from financial institutions like Banks, LIC, HUDCO, HDFC, IFCI etc., previous years audited accounts evaluated for determining the capability of returning the loan.

➢ Regular audit of account create fear among the employees in the accounts department and exercise a great moral influence on clients staff thereby restraining them from commit frauds and errors.

➢ Audited accounts facilitate settlement of claims on the retirement/death of a partner.

➢ In the event of loss of property by fire or on happening of the event insured against, Audited accounts help in the early settlement of claims from the insurance company.

➢ In case of joint Stock Company where ownership is separated from management, audit of accounts ensure the shareholders that accounts have been properly maintained, funds are utilized for the right purpose and the management have not taken any undue advantage of their position.

➢ To determine the value of the business in the event of purchase or sales of the business, audited account will be the treated as the base for the evaluation.

➢ The audit of accounts by a qualified auditor also help the management to understand the financial position of the business and also it will help the management to take decision on various matters like report in internal control system of the organization or setting up of an internal audit department etc.

➢ If the accounts have been audited by an independent person, disputes between the management and labor unions on payment of bonus and higher wages can be settled amicably.

➢ In the event of admission of a new partner, audited accounts will facilitate the formation of terms and conditions for joining the new partner. Last 3 years audited accounts and balance sheet will give a general idea about the growth and financial position of the business to the new partner.

Types of Audit Report

Audit Reports are categorized into four categories. Each type is briefly described as follows:

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1. Standard Unqualified Audit Report

A standard unqualified audit report indicates that the opinion expressed is "clean" and management's assertions in regard to the financial statements are usually found to be in conformance with generally accepted accounting principles. The standard unqualified audit report is the most common type of audit report. Both the auditor and the client desire the issuance of an unqualified report, because it indicates that "the auditor has no reservations about the fairness of presentation". An unqualified report indicates that the "audit was performed in accordance with generally accepted auditing standards (for nonpublic companies) or in accordance with the standards of the PCAOB (for public companies)"

Parts of Standard Unqualified Audit Report

1. Report title Auditing standards require that the report be titled and that the title includes the word independent. 2. Audit report address The report is usually addressed to the company, its stockholders, or the board of directors. 3. Introductory paragraph The first paragraph of the report does three things: first, it makes the simple statement that the CPA firm has done an audit. Second, it lists the financial statements that were audited, including the balance sheet dates and the accounting periods for the income statement and statement of cash flows. Third, it states that the statements are the responsibility of management and that the auditor's responsibility is to express an opinion on the statements based on an audit. 4. Scope paragraph The scope paragraph is a factual statement about what the auditor did in the audit. The remainder briefly describes important aspects of an audit. 5. Opinion paragraph The final paragraph in the standard report states the auditor's conclusions based on the results of the audit. 6. Name of CPA firm The name identifies the CPA firm or practitioner who performed the audit. 7. Audit report date The appropriate date for the report is the end of fieldwork, when the auditor has gathered sufficient appropriate evidence to support the opinion.

The same seven parts are found in a qualified report as in an unqualified report. There are also often one or more additional paragraphs explaining reasons for the qualifications.

Conditions of Standard Unqualified Audit Report

An unqualified report may be issued under the following five circumstances:

1. All statements—balance sheet, income statement, statement of retained earnings, and statement of cash flows—are included in the financial statements. 2. The three general standards have been followed in all respects on the engagement. 3. Sufficient evidence has been accumulated and the auditor has conducted the engagement in a manner that enables him or her to conclude that the three standards of field work have been met. 4. The financial statements are presented in accordance with generally accepted accounting principles. This also means that adequate disclosures have been included in the footnotes and other parts of the financial statements. 5. There are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report.

2. Unqualified With Explanatory Paragraph or Modified Wording

The Unqualified with Explanatory Paragraph or Modified Wording meets the criteria of a complete audit with satisfactory results and financial statements that are fairly presented, but the auditor believes it is important or is required to provide additional information.

The following are the most important causes of the addition of an explanatory paragraph or a modification in the wording of the standard unqualified report:

1. Lack of consistent application of generally accepted accounting principles

2. Substantial doubt about going concern

3. Auditor agrees with a departure from promulgated accounting principles

4. Emphasis of a matter

5. Reports involving other auditors

Departures from an Unqualified Audit Report

The three conditions requiring a departure from an unqualified opinion are:

1. The scope of the audit has been restricted. One example is when the client will not permit the auditor to confirm material receivables. Another example is when the engagement is not agreed upon until after the client's year-end when it may be impossible to physically observe inventories. 2. The financial statements have not been prepared in accordance with generally accepted accounting principles. An example is when the client insists upon using replacement costs for fixed assets. 3. The auditor is not independent. An example is when the auditor owns stock in the client's business.

3. Qualified Audit Report

A Qualified report is issued when the auditor encountered one of two types of situations which do not comply with generally accepted accounting principles, however the rest of the financial statements are fairly presented. This type of opinion is very similar to an unqualified or "clean opinion", but the report states that the financial statements are fairly presented with a certain exception which is otherwise misstated. The two types of situations which would cause an auditor to issue this opinion over the Unqualified opinion are:

Single deviation from GAAP - this type of qualification occurs when one or more areas of the financial statements do not conform with GAAP (e.g. are misstated), but do not affect the rest of the financial statements from being fairly presented when taken as a whole. Examples of this include a company dedicated to a retail business that did not correctly calculate the depreciation expense of its building. Even if this expense is considered material, since the rest of the financial statements do conform with GAAP, then the auditor qualifies the opinion by describing the depreciation misstatement in the report and continues to issue a clean opinion on the rest of the financial statements.

Scope of limitation - this type of qualification occurs when the auditor could not audit one or more areas of the financial statements, and although they could not be verified, the rest of the financial statements were audited and they conform GAAP. Examples of this include an auditor not being able to observe and test a company's inventory of goods. If the auditor audited the rest of the financial statements and is reasonably sure that they conform with GAAP, then the auditor simply states that the financial statements are fairly presented, with the exception of the inventory which could not be audited.

4. Adverse or Disclaimer Audit Report

An Adverse Opinion is issued when the auditor determines that the financial statements of an auditee are materially misstated and, when considered as a whole, do not conform to GAAP. It is considered the opposite of an unqualified or clean opinion, essentially stating that the information contained is materially incorrect, unreliable, and inaccurate in order to assess the auditee’s financial position and results of operations. Investors, lending institutions, and governments very rarely accept an auditee’s financial statements if the auditor issued an adverse opinion, and usually request the auditee to correct the financial statements and obtain another audit report.

Generally, an adverse opinion is only given if the financial statements pervasively differ from GAAP An example of such a situation would be failure of a company to consolidate a material subsidiary.

The wording of the adverse report is similar to the qualified report. The scope paragraph is modified accordingly and an explanatory paragraph is added to explain the reason for the adverse opinion after the scope paragraph but before the opinion paragraph. However, the most significant change in the adverse report from the qualified report is in the opinion paragraph, where the auditor clearly states that the financial statements are not in accordance with GAAP, which means that they, as a whole, are unreliable, inaccurate, and do not present a fair view of the audile’s position and operations.

Case analysis

Case No: 3-23

Requirements: A careful reading of an unqualified report indicates several important phrases. Explain why each of the following phrases or clauses is used rather than the alternative provided.

Analysis of Case Requirement:

a) “The financial statements present fairly”-It means that the auditor is absolutely following GAAP and there is no mistake or error. But it is impossible because an auditor can only provide reasonable assurance as financial statements may contain information risk, so auditor cannot say with absolute assurance. For this an auditor can only express his opinion. b) “The financial statements mentioned above are correctly stated”- It means that the auditor has only performed the audit to detect material misstatement but we know that the goal of auditing is broader as to judge whether the financial statements are fairly stated or not this statement also does not tell about the Following of audit standards. So it is to say that ‘we conducted our audit in accordance with Generally Accepted Audit Standards. c) “The financial statements mentioned above are correctly stated.”-It means information included in the financial statements is absolutely correct. But Audit can only provide high level of assurance but not a guarantee, so the previous phrases should be used which means that auditor has high level of Endeavour to present the financial statements fairly. d) “Are properly stated to represent the rue economic conditions.”-But the auditing alone cannot show the true economic conditions as audit is held in respect of balance sheet or financial statements. So it can only represent the financial condition. So this phrase “in conformity with GAAP.” Should be used. e) Typically, the firm’s name used because the entire CPA firm has the legal and professional responsibility to ensure that the quality of the audit meets professional standards.

Case No: 3-24

Requirements:

(a)Identify and explain any items included in “Other Information “that need not be part of the auditor’s report.

(b)Explain the deficiencies in Roscoe’s report as drafted

Analysis of Case Requirement:

(a)

|No. | Items Need not to Include In the Audit Report |
|1 |It is not necessary to describe particular change in method of accounting for long-term construction contracts and so should not be included |
| |in the report since it is already discussed in the footnotes. The auditor's report must state that there is a change in accounting principles|
| |and refer to the footnote |
|2 |The fact that normal receivable confirmation procedures were not used should not be disclosed since the auditor was able to satisfy him or |
| |herself through alternate audit procedures |
|3 |The lawsuit need not be discussed in the report since it has been included in a footnote. [Note: prior to the issuance of SAS 79, the auditor|
| |would have been required to add an explanatory paragraph to the audit report that referred to the footnote |

(b)

|No. |Deficiencies in Roscoe’s report as drafted |
|1 |The audit report is neither addressed nor dated and it does not contain a title. The audit report date should be the last day of field |
| |work. |
|2 |An additional paragraph should be included which describes the dividend restrictions and the refusal of the client to present a |
| |statement of cash flows |
|3 |The word material is excluded from the scope paragraph (free of material misstatement) |
|4 |The audit was made in accordance with auditing standards generally accepted in the United States of America rather than generally |
| |accepted accounting standards |
|5 |There is no separate scope paragraph that describes what an audit is |
|6 |There is no separate introductory paragraph that states the financial statements audited, dates, and the responsibilities of management|
| |and the auditor |
|7 |There are comparative statements, but the audit report identifies and deals with only the current year's financial statements. An |
| |opinion must also be included for the prior period financial statements |
|8 |The opinion paragraph excludes the required phrase, "in all material respects |
|9 |A separate paragraph should be included stating that generally accepted accounting principles were not consistently applied |
|10 |The opinion should be qualified rather than being unqualified. Qualifications are caused by the failure to present a statement of cash |
| |flows and the failure to disclose the dividend restrictions |

Case no: 3-25

Requirements:

For each of situation, doing the following-

• a. Identify which of the conditions requiring a modification of or a deviation from an unqualified standard report is applicable.

• b. State level of materiality as immaterial, material, or highly material. If you can not decide the level of materiality, state the additional information needed to make a decision.

• c. Given your answers a, and b, state the type of audit report that should be issued. If you have not decided on one level of materiality in part b, state the appropriate report for each alternative materiality level.

Analysis of Case Requirement

(a)

|No. | Conditions requiring a modification of or a deviation |
|1 |Scope of the audit has been restricted |
|2 |Failure to follow GAAP |
|3 |Lack of independence |
|4 |None |
|5 |Scope of the audit has been restricted |
|6 |Scope of the audit has been restricted |

(b)

|No. | Level of materiality |
|1 |Highly Material |
|2 |Highly material or material which can be judged based on additional information. |
|3 |Is not applicable |
|s4 |Is not applicable |
|5 |Highly material |
|6 |Highly material |

(c)

|No. | |
|1 | Disclaimer |
|2 | Adverse |
|3 | Disclaimer |
|4 | Unqualified |
|5 | Disclaimer |
|6 | Unqualified |

Case analysis 3-26

|Questions |Conditions requiring a |Level of materiality |Appropriate type of audit report |
| |modification or a deviation | | |
| |from an unqualified standard| | |
| |report | | |
|1. Kieko Corporation has prepared |All statements are not |Immaterial |Unqualified-explanatory paragraph |
|financial statements but has decided |included in the financial | | |
|to exclude the statement of cash |statements | | |
|flows. Management explains to you |(exclude the statement of | | |
|that the users of their financial |cash flow which is not meet | | |
|statements find this statement |the condition of standard | | |
|confusing and prefer not to have it |unqualified audit report) | | |
|included | | | |
|2. Jet Stream Airlines has been |Doubt about going concern |Additional information needed |Unqualified-explanatory paragraph |
|audited by your firm for 10years. In |(So deviation from an | | |
|the past 3 years their financial |unqualified audit report is | | |
|condition has steadily declined. In |applicable) | | |
|the current year, for the first time,| | | |
|the current ratio is below 2.1, which| | | |
|is the minimum requirement specified | | | |
|in Jet Streams major loan agreement. | | | |
|You now have reservations about the| | | |
|ability of Jet Stream to continue in | | | |
|operation for the next year. | | | |
|3. Approximately 20% of the audit of |No deviation from an |Immaterial |Unqualified-standard wording |
|Fur Farms, Inc., was performed by a |unqualified standard report | | |
|different CPA firm, selected by you. |(Because other auditor | | |
|You have their working papers and |audited an immaterial | | |
|believe they did an excellent job on |portion 20% of the | | |
|their portion of the audit. |statements and it is closely| | |
|Nevertheless, you are unwilling to |supervised the principal | | |
|take complete responsibility for |auditor) | | |
|their work. | | | |
| | | | |
| | | | |
| | | | |
|4. The controller of Fair City Hotels|Scope limitation |Material |Qualified scope and opinion |
|Co. will not allow you to confirm the|(The company will not allow| | |
|receivable balance from two of its |the auditor to confirm the | | |
|major customers. The amounts of the |receivable balance from two | | |
|receivables are material in relation |of its major customers) | | |
|to Fair City’s financial statements. | | | |
|You are unable to satisfy yourself as| | | |
|to the receivable balance by | | | |
|alternative procedures. | | | |
|5. In the last 3 months of the |Doubt about going concern |Immaterial |Unqualified-explanatory paragraph |
|current year, Oil Refining Company |(So here exists deviation | | |
|decided to change direction and go |from an unqualified standard| | |
|significantly into the oil drilling |report) | | |
|business. Management recognizes that | | | |
|firing business is exceptionally | | | |
|risky and could jeopardize the | | | |
|success of its existing refining | | | |
|business, but there are significant | | | |
|potential rewards. During the short | | | |
|periods of operation in drilling the | | | |
|company has had three dry wells and | | | |
|no success. The facts are adequately | | | |
|disclosed in footnotes. | | | |
|6. Your client, Auto Rental Company, |There exists deviation from |Material |Unqualified-explanatory paragraph |
|has changed from straight line to sum|an unqualified standard | | |
|of the years digits depreciation. The|report because the company | | |
|effect on this year’s income is |has changed from straight | | |
|immaterial, but the effect in future |line to sum of the year's | | |
|years is likely to be material. The |digits depreciation. | | |
|facts are adequately disclosed in | | | |
|footnotes. | | | |

Case analysis: 3-27

|Questions |Conditions requiring a |Level of materiality |Appropriate type of audit report|
| |modification or a deviation| | |
| |from an unqualified | | |
| |standard report | | |
|1. CPA learned that a recent fire |In this situation deviation|Material |Unqualified-explanatory |
|cause a heavy damage to one of a |from an unqualified | |paragraph |
|clients two plants, the loss will |standard report is | | |
|not be reimbursed by insurance. |applicable because of | | |
|Newspaper described the events in |emphasis of a matter | | |
|details, but the financial | | | |
|statements did not disclose the | | | |
|loss caused by fire. | | | |
|2. CPA is engaged in the audit of |In this situation deviation|Imaterial |Unqualified-explanatory |
|financial statements of a large |from an unqualified | |paragraph |
|manufacturing company with branch |standard report is | | |
|offices in many widely separated |applicable because of scope| | |
|cities. It is not possible to count|restriction | | |
|the substantial undeposited cash | | | |
|receipt at the close of business on| | | |
|the last day of the fiscal year at | | | |
|all branch office. | | | |
|3. On January 2, 1999, the Retail |In this situation deviation|Immaterial |Unqualified-explanatory |
|Auto Parts Company received a |from an unqualified | |paragraph |
|notice from its primary supplier |standard report is | | |
|that effective immediately, all |applicable because of | | |
|wholesale price would be increased |emphasis of a matter | | |
|10% | | | |
|4. During 1999. The research staff |In this situation deviation|Material |Qualified opinion only except |
|of Scientific Research Corporation |from an unqualified | |for |
|devoted its entire forts toward |standard report is | | |
|developing a new pollution control |applicable because of lack | | |
|device. |of consistent application | | |
| |of GAAP that affect | | |
| |comparability | | |
| | | | |
|5. For the past 5 years a CPA has |In this situation deviation|Materiality level is not |Disclaimer of opinion is |
|audited the financial statements of|from an unqualified |considered |applicable regardless of |
|a manufacturing company. During |standard report is | |materiality level. |
|this period, the audit scope was |applicable because of | | |
|limited by the client as to the |auditor is not independent.| | |
|observation of the annual physical | | | |
|inventory. | | | |
|6. During the course of his audit | |maierial | |
|of the financial statements of a |In this situation deviation| |Qualified scope and opinion |
|corporation for the purpose of |from an unqualified | | |
|expressing an opinion on the |standard report is | | |
|statements, a CPA is refused |applicable because of | | |
| |auditor is dependent on the| | |
| |decision of the board of | | |
| |directors | | |
|7. A CPA firm completed his audit | |Immaterial |Unqualified standard wording |
|of a finncial statement of a Bus |In this situation deviation| | |
|company for the year ended December|from an unqualified | | |
|31, 1999. Prior to 1999 the company|standard report is | | |
|has been depreciating its buses |applicable because of the | | |
|over a 10 year period. |overall depreciation period| | |
| |is changed. | | |

Case analysis: 3-28

| | |SHOULD AUDITOR'S REPORT BE |
| | |MODIFIED? |
|ITEM NO. | | |
| |TYPE OF CHANGE | |
|1 |An error correction not involving an accounting principle. |No |
| |An accounting change involving a correction of an error in principle, which is | |
|2 |accounted for as a correction of an error. |Yes |
| |An accounting change involving a change in the reporting entity, which is a special | |
|3 |type of change in accounting principles. |Yes |
| |An accounting change involving both a change in accounting principle and a change in | |
| |accounting estimate. Although the effect of the change in each may be inseparable and| |
|4 |the accounting for such a change is the same as that for a change in estimate only, |Yes |
| |an accounting principle is involved. | |
| |An accounting change involving a change from one generally accepted accounting | |
|5 |principle to another generally accepted accounting principle. |Yes |
|6 |An accounting change involving a change in an accounting estimate. |No |
|7 |Not an accounting change but rather a change in classification. |No |
| |An accounting change from one generally accepted accounting principle to another | |
|8 |generally accepted accounting principle. |Yes |

Case analysis: 3-29

a) The auditor should provide Disclaimer of opinion Because the auditor is not independent. b) Here the auditor made an audit till December 31,1999. He is only responsible to provide opinion beyond this date. The audit was completed on March 9, 2000. So he is not responsible to provide opinion from January-March 31, 2000.

Now the appropriate wording releted to the disclaimer of opinion on the reports till December 31, 1999 is given as follows:

We (auditors) are not independent with respect to Tri-Nation Coin Investments, and the accompanying balance sheet as of December 31, 1999, and the related atatements of income, retained earnings, and cash flows for the year then ended were not audited by us (by auditors). Accordingly, we (auditors) do not express an opinion on them.

Case analysis: 3-30

The following opinion should be issued:

Because there were significant deficiencies in internal control that resulted in the lack of detailed records and other supporting data being available for our audit, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on these financial statements.

The opinion paragraph should immediately follow the paragraph that discusses the scope restriction.

Case analysis: 3-31

a) As the reports do not follow the GAAP properly and the materiality is so pervasive this condition of the report requires departure from unqualified audit report.

b) Here the opinion should be an adverse opinion.

|Condition |Material, but does not overshadow Financial |So Material that overall Fairness Is in |
| |Statements as a Whole |Question |
|Financial statements not |A misstatement of inventory- it does not affect |Failure to record a material sale- it affects |
|prepared in accordance with|other part of the statement. |sales, AC Receivables, Income tax exp, accrued |
|GAAP | |income tax, retained earnings, current assets, |
| | |current liabilities, total assets, total |
| | |liabilities etc. |
|Opinion type |Additional paragraph and qualified opinion |Adverse opinion |
| |only(except for) | |

As the materiality of the mistake is so pervasive, because the Bank has charged goodwill and certain other intangible assets acquired in two separate acquisitions directly to shareholders’ equity it affects the current assets, liabilities, income, tax, retained earnings, total assets, total liabilities etc. the auditor should provide adverse opinion.

c) The opinion paragraph for this audit situation assuming a standard wording scope paragraph is as follows:

In our opinion, because of the effect of the matters discussed in the preceding paragraph, the financial statements referred to above do not present fairly in conformity with Generally Accepted Accounting Principles, the financial position of California First Bank as of December 31, 1998, or the result of its operations and its cash flow for the year then ended.

Case analysis: 3-32

Deficiencies in the staff accountant's tentative report include the following:

1. Report title must include the word “independent.” 2. The report should generally be addressed to the board of directors or stockholders, not to the audit committee. 3. The introductory paragraph should state, "we have audited," not "we have examined." 4. When the principal auditor decides to make reference to the audit of another auditor, the report should indicate clearly in the introductory paragraph the division of responsibility regarding the portions of the financial statements audited by each. Also, the opinion paragraph should state that the opinion is based in part on the reports of other auditors. Neither of these was done. 5. When the principal auditor decides to make reference to the audit of the other auditor, the report should disclose the dollar amounts or percentages of the portion of the financial statements audited by the other auditor. This was not done. 6. The second paragraph is an inappropriately worded scope paragraph. It should be stated as follows:

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those 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 a 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. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.

7. Although the introductory paragraph referred to an audit of the financial statements for the years ended December 31, 2007 and 2006, an opinion was expressed only on the 2007 financial statements. 8. The statement of cash flows was not identified in the opinion paragraph, and financial statements were not referred to in the opinion paragraph as "consolidated." 9. The explanatory sentence for consistency should follow the opinion paragraph, not precede it. Also, the second sentence in the third paragraph should be omitted. 10. There is no inclusion of the phrase, "in all material respects" in the opinion paragraph.

Recommendation

Our recommendation is that everyone should main taint the professional code of conduct that can minimize the dilemma and can speed up the better performance and better working environment,
There some points of view are given below;
01 Membership in the American Institute of Certified Public Accountants is voluntary. By accepting membership, a certified public accountant assumes an obligation of self-discipline above and beyond the requirements of laws and regulations.
02 These Principles of the Code of Professional Conduct of the American Institute of Certified Public Accountants express the profession's recognition of its responsibilities to the public, to clients, and to colleagues. They guide members in the performance of their professional responsibilities and express the basic tenets of ethical and professional conduct. The Principles call for an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage.
03 The public interest aspect of certified public accountants' services requires that such services be consistent with acceptable professional behavior for certified public accountants. Integrity requires that service and the public trust not be subordinated to personal gain and advantage. Objectivity and independence require that members be free from conflicts of interest in discharging professional responsibilities. Due care requires that services be provided with competence and diligence.

04 Each of these Principles should be considered by members in determining whether or not to provide specific services in individual circumstances. In some instances, they may represent an overall constraint on the no audit services that might be offered to a specific client. No hard-and-fast rules can be developed to help members reach these judgments, but they must be satisfied that they are meeting the spirit of the Principles in this regard.

05 In order to accomplish this, members should • Practice in firms that have in place internal quality-control procedures to ensure that services are competently delivered and adequately supervised. • Determine, in their individual judgments, whether the scope and nature of other services provided to an audit client would create a conflict of interest in the performance of the audit function for that client. • Assess, in their individual judgments, whether an activity is consistent with their role as professionals

Conclusion

Auditing is a systematic examination of the books and records of a business or the organization in order to ascertain or verify and to report upon the facts regarding the financial operation and the result thereof. An audit is an examination of accounting records undertaken with a view to establishing whether they correctly and completely reflect the transactions to which they relate. In some instances, it may be necessary to ascertain whether the transactions themselves are supported by authority. It is clear from the above analysis that auditing is the systematic and scientific examination of the books of a accounts and records of a business so as to enable the auditor to satisfy himself that the Balance Sheet and the Profit and Loss Account are properly drawn up so as to exhibit a true and fair view of the financial state of affairs of the business and profit or loss for the financial period. The Auditor will have to go through various books and accounts and related evidence to satisfy him about the accuracy and authenticity to report the financial health of the business.