1. Your neighbour invited you to lunch yesterday. Sure enough, it was no “free lunch”, because he wanted to discuss the annual report of the Dodge Corporation. He owns Dodge shares and just received the report. He says, “PwC prepared the audited financial statements and gave an unqualified opinion, so my investment must be safe”.
Required. Whta misconceptions does your neighbour seem to have about the auditor’s role with respect to Dodge Corporation?
2. The standard unmodified report contains severl importnt sentences and phrases. Give an explanation of why each of the following phrases is used instead of the alternative language indicated.
a. Adress: “To the Board of Directors and Stockholders” instead of ” To whom it may concern.”
b. “We have audited the balance sheet of Anycompany as of December 31, 20×2, and the related statements of income, retained earnings, and cash flows for the year then ended”, instead of ” We have audited the attached financial statements”.
c. “We coducted our audit in accordance with generally accepted auditing standards” instead of ” Our audit was conducted with due audit care appropriate in the circumstances”.
d. In our opinion , the financial statementsreffered to above present fairly…in conformity with generally accepted accounting principales” instead of ” The financial statements are true and correct”.
3. Ellen Eagle is a banker in a small town. Her customers, Deve and Dot Dauber, are the owners of a franchised candy store in town. They have an opportunity to bu a second franchised store in a neearby town, and are requesting that Ellen increase their bank loan from $300,000 to $2,000,000 to finance this aquisition. The Daubers are two of Ellen’s best customers and have always made the loan payments on time during the 10 years they have been customers of her bank. Currently, Ellen is requiring tht Daubers provide annual financial statements with a review report of a PA. To approve the requested loan increase, the bank’s head office will require them to provide annual audited financial statements.
Required: Distinguish between a review report and an audit report. Why would the bank require an audit instead of a review in this case. Do you think the bank’s policy is reasonable?