Jeff Johns Is a Staff Accountant and Has Been Assigned

question 38

Essay

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, 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 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?

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Definitions:

Lawn-mowing

The act of cutting the grass of a lawn to maintain a specified height and neat appearance.

Variable Costs

Expenses that change in proportion to the activity or volume of goods or services produced.

Snow-clearing

Snow-clearing involves the removal of snow from roads, sidewalks, and other public areas to ensure safety and accessibility during winter conditions.

Perfectly Competitive

Refers to a market scenario where an unlimited number of buyers and sellers operate, and the single product offered is homogenous, making no single entity able to influence the market price.