Reference no: EM131774556

Problem - Allison, CPA, has completed the audit of the financial statements of Optima Corporation as of and for the year ended December 31, 2009. Allison also audited and reported on the Optima financial statements for the prior year. Allison drafted the following report for 2009.

We have audited the balance sheet and statements of income and retained earnings of Optima Corporation as of December 31, 2009. We conducted our audit in accordance with generally accepted accounting standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of misstatement. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly the financial position of Optima Corporation as of December 31, 2009, and the results of its operations for the year then ended in conformity with generally accepted auditing standards, applied on a basis consistent with those of the preceding year. Allison, CPA (Signed)

Other Information

• Optima is presenting comparative financial statements.
• Optima does not wish to present a statement of cash flows for either year.
• During 2009, Optima changed its method of accounting for long-term construction contracts and properly reflected the effect of the change in the current year's financial statements and restated the prior year's statements. Allison is satisfied with Optima's justification for making the change. The change is discussed in footnote 12.
• Allison was unable to perform normal accounts receivable confirmation procedures, but alternative procedures were used to satisfy Allison as to the existence of the receivables.
• Optima Corporation is the defendant in a litigation, the outcome of which is highly uncertain. If the case is settled in favor of the plaintiff, Optima will be required to pay a substantial amount of cash, which might require the sale of certain fixed assets. The litigation and the possible effects have been properly disclosed in footnote 11.
• Optima issued debentures on January 31, 2008, in the amount of $10 million. The funds obtained from the issuance were used to finance the expansion of plant facilities.

The debenture agreement restricts the payment of future cash dividends to earnings after December 31, 2013. Optima declined to disclose this essential data in the footnotes to the financial statements.

REQUIRED:

a. Identify and explain any items included in "Other Information" that need not be part of the auditor's report.

b. Explain the deficiencies in Allison's report as drafted. (AICPA Adapted).