Jeff Johns is a staff accountant and has been assigned to the audit of Worldwide Enterprises, Inc. Subsequent to the completion of fieldwork, Jeff was assigned to draft the audit report. The content of one of the paragraphs he has drafted reads as follows: As explained in Note 2 to the financial statements, Worldwide Enterprises has charged goodwill and certain other intangible assets acquired in two separate acquisitions directly to shareholders' equity. Under generally accepted accounting principles, these intangibles should have been recorded as assets and amortized to income over future periods. Had these intangibles been capitalized, total assets would have increased by $400,000 as of December 31, 2011 and net income and earnings per share would be increased by $380,000 and $2.25,

Question

respectively (assuming a 20-year amortization period).

a. Based on the contents of the paragraph above, which condition requiring a departure from a standard unqualified/unmodified opinion exists in the engagement?
b. Assuming that the engagement partner agrees with the paragraph Jeff has prepared above, where in the auditor's report should the paragraph be placed?
c. How would the materiality of the condition above affect the final choice of opinion?

Answer 1

a. The paragraph indicates a departure from GAAP, which would require a departure from a standard unqualified/unmodified opinion--either qualified or adverse, depending on the materiality of the issue.
b. If a qualified or an adverse report is issued, the paragraph should be placed before the opinion paragraph.
c. A material misstatement would require a qualified opinion. A pervasively material misstatement would require an adverse opinion.