Selecting the Proper Audit Opinion and Report Modification

16-47 (Selecting the Proper Audit Opinion and Report Modification)
Required
Audit situations 1 through 8 present various independent factual situations an auditor
might encounter in conducting an audit. List A represents the types of opinions
the auditor ordinarily would issue, and List B represents the report
modifications (if any) that would be necessary. For each situation, select one response
from List A and one from List B. Select, as the best answer for each item,
the action the auditor normally would take. Items from either list may be selected
once, more than once, or not at all.

Assume the following:
? The auditor is independent.
? The auditor previously expressed an unqualified opinion on the prior-year financial
statements.
? Only single-year (not comparative) statements are presented for the current year.
? The conditions for an unqualified opinion exist unless contradicted in the factual
situations.
? The conditions stated in the factual situations are material.
? No report modifications are to be made except in response to the factual situation.

Audit Situations:
1. The financial statements present fairly, in all material respects, the financial position,
results of operations, and cash flows in conformity with GAAP.

2. In auditing the Long-Term Investments account, an auditor is unable to obtain
audited financial statements for an investee located in a foreign country.
The auditor concludes that sufficient competent evidential matter regarding
this investment cannot be obtained but is not significant enough to disclaim an
opinion.

3. Due to recurring operating losses and working capital deficiencies, an auditor
has substantial doubt about an entity's ability to continue as a going concern
for a reasonable period of time. However, the financial statement disclosures
concerning these matters are adequate.

4. The principal auditor decides to refer to the work of another auditor, who audited
a wholly owned subsidiary of the entity and issued an unqualified opinion.

5. An entity issues financial statements that present financial position and results
of operations but omits the related statement of cash flows.Management discloses
in the notes to the financial statements that it does not believe the statement
of cash flows to be a useful statement.

6. An entity changes its depreciation method for production equipment from the
straight-line to a units-of-production method based on hours of utilization.
The auditor concurs with the change, although it has a material effect on the
comparability of the entity's financial statements.

7. An entity is a defendant in a lawsuit alleging infringement of certain patent
rights. However, management cannot reasonably estimate the ultimate outcome
of the litigation.The auditor believes that there is a reasonable possibility
of a significant material loss, but the lawsuit is adequately disclosed in the
notes to the financial statements.

8. An entity discloses certain lease obligations in the notes to the financial statements.
The auditor believes that the failure to capitalize these leases is a departure
from GAAP.

List A?Types of Opinions
a. A qualified opinion
b. An unqualified opinion
c. An adverse opinion
d. A disclaimer of opinion
e. Either a qualified opinion or an adverse opinion
f. Either a disclaimer of opinion or a qualified opinion
g. Either an adverse opinion or a disclaimer of opinion

List B?Report Modifications
h. Describe the circumstances in an explanatory paragraph preceding the opinion
paragraph without modifying the three standard paragraphs.
i. Describe the circumstances in an explanatory paragraph following the opinion
paragraph without modifying the three standard paragraphs.
j. Describe the circumstances in an explanatory paragraph preceding the opinion
paragraph and modifying the opinion paragraph.
k. Describe the circumstances in an explanatory paragraph following the opinion
paragraph and modifying the opinion paragraph.
l. Describe the circumstances in an explanatory paragraph preceding the opinion
paragraph and modifying the scope and opinion paragraphs.
m. Describe the circumstances in an explanatory paragraph following the opinion
paragraph and modifying the scope and opinion paragraphs.
n. Describe the circumstances within the scope paragraph without adding an explanatory
paragraph.
o. Describe the circumstances within the opinion paragraph without adding an
explanatory paragraph.
p. Describe the circumstances within the scope and opinion paragraphs without
adding an explanatory paragraph.
q. Describe the circumstances in the introductory paragraph without adding an
explanatory paragraph, and modify the wording of the scope and opinion paragraphs.
r. Issue the standard auditor's report without modification.