Auditing & Assurance Services 6th Edition by Timothy Louwers

Exercise 12

Late Appointment of Auditors. Anderson, Olds, Watershed (AOW) has completed the audit of the financial statements of Musgrave Company for the year ended December 31, 2014, and is now preparing the report.
AOW has audited Musgrave's financial statements for several years, but this year Musgrave delayed the start of the audit work, so AOW was not present to observe the taking of the physical inventory on December 31, 2014. The inventory balance is $194,000, which represents 39 percent of Musgrave's total assets and 69 percent of its current assets. However, AOW performed alternative procedures including (1) examination of shipping and receiving documents with regard to transactions since the date of the financial statements, (2) extensive review of the inventory count sheets, and (3) discussion of the physical inventory procedures with responsible company personnel. AOW also is satisfied about the propriety of the inventory valuation calculations and the consistency of the valuation method. Musgrave determines year-end inventory quantities solely by means of physical count.
Required:
Draft AOW's report on the balance sheet at the end of the current year and on the statements of operations, changes in shareholders' equity, and cash flows for the year then ended. ( Hint: Did the alternative procedures produce sufficient appropriate evidence?)