The following are independent situations for which you willrecommend an appropriate audit report: 1. Subsequent to the date ofthe financial statements as part of his post-balance sheet dateaudit procedures, a CPA learned that a recent fire caused heavydamage to one of a client’s two plants; the loss will not bereimbursed by insurance. The newspapers described the event indetail. The financial statements and footnotes as prepared by theclient did not disclose the loss caused by the fire. 2. During thecourse of his audit of the financial statements of a corporationfor the purpose of expressing an opinion on the statements, a CPAis refused permission to inspect the minutes of board of directors’meetings that document significant decisions of the board. Thecorporation secretary instead offers to give the CPA a certifiedcopy of all resolutions and actions involving accounting matters.3. A CPA is engaged in the audit of the financial statements of alarge manufacturing company with branch offices in many widelyseparated cities. The CPA was not able to count the substantialundeposited cash receipts at the close of business on the last dayof the fiscal year at all branch offices. As an alternative to thisauditing procedure used to verify the accurate cutoff of cashreceipts, the CPA observed that deposits in transit as shown on theyear-end bank reconciliation appeared as credits on the bankstatement on the first business day of the new year. He wassatisfied as to the cutoff of cash receipts by the use of thealternative procedure. 4. On January 2, 2020, the Retail Auto PartsCompany received a notice from its primary supplier that effectiveimmediately, all wholesale prices will be increased by 10 percent.On the basis of the notice, Retail Auto Parts revalued its December31, 2019, inventory to reflect the higher costs. The inventoryconstituted a material proportion of total assets; however, theeffect of the revaluation was material to current assets but not tototal assets or net income. The increase in valuation is adequatelydisclosed in the footnotes. 5. A CPA has completed her audit of thefinancial statements of a bus company for the year ended December31, 2019. Prior to 2019, the company depreciated its buses over a10-year period. During 2019, the company determined that a morerealistic estimated life for its buses was 12 years and computedthe 2019 depreciation on the basis of the revised estimate. The CPAhas satisfied herself that the 12-year life is reasonable.Thecompany has adequately disclosed the change in estimated usefullives of its buses and the effect of the change on 2019 income in anote to the financial statements. 6. E-Lotions.com, Inc., is anonline retailer of body lotions and other bath and body supplies.The company records revenues at the time customer orders are placedon the website, rather than when the goods are shipped, which isusually two days after the order is placed. The auditor determinedthat the amount of orders placed but not shipped as of the balancesheet date is not material.
b. State the level of materiality as immaterial, material, orhighly material. If you cannot decide the level of materiality,state the additional information needed to make a decision.
