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This post addresses auditing issues and contingencies.

Below are two independent situations:
A. Grinner and Greeter, CPAs, were engaged to perform an audit of the financial statements of Happy, Inc. Happy's management would not allow Grinner and Greeter to confirm any of the accounts receivable. All other auditing procedures were performed as considered necessary by Grinner and Greeter and no problems were found. However, Grinner and Greeter were unable to satisfy themselves with regard to the balance in the accounts receivable.
B. Tick and Tie , CPAs, were performing their annual audit of Johnson Manufacturing Company. Johnson is currently being sued for $2,000,000 related to an alleged defective product that they sold to a customer. Johnson's legal counsel has told Tic and Tie that it is probable that Johnson will lose the suit and have to pay the entire $2,000,000. Johnson's management has included information in the footnotes about the lawsuit. However, they have not recorded any loss or liability in income statement or balance sheet.
Required:
For each of the independent situations presented above, state what type of opinion should be issued on the company's financial statements. Briefly explain your rationale. Finally, state which paragraphs, if any, of the standard report would be modified

Solution Preview

Below are two independent situations.

A. Grinner and Greeter, CPAs, were engaged to perform an audit of the financial statements of Happy, Inc. Happy's management would not allow Grinner and Greeter to confirm any of the accounts receivable. All other auditing procedures were performed as considered necessary by Grinner and Greeter and no problems were found. However, Grinner and Greeter were unable to satisfy themselves with regard to the balance in the accounts receivable.

Situation A would be a disclaimer of opinion. This happens when the auditor has no means to base the entire opinion, which is what happened above. The auditor has determined that the financial statements are ...

Solution Summary

The solution provides a detailed explanation for both scenarios explaining the type of opinion that should be issued on the company's financial statements including the applicable rationale. The affected paragraphs of the standard report are also identified.

$2.19