In preparation for tomorrow's meeting with the partner and likely subsequent meeting with Murchison management, develop recommended responses to the following possible scenarios. In developing your responses, assume that each scenario is independent of the others:
(a) If generally accepted accounting principles require disclosure of this contingency, how would you respond to management's decision against disclosure because they view the claim as immaterial to the December 31, 2014 financial statements? Do you believe the potential loss is material? Why or why not?
(b) Assume that even though you convince management that the claim is material, they refuse to provide any disclosure that might be required. Prepare a draft of the auditor's report that would be issued in that scenario.
(c) Assume that you determine, through subsequent discussions with the attorney, that a more likely estimate of the range of loss falls between $50,000 to $75,000. What type of financial statement disclosure do you believe is required in that case?
(d) Assume that you determine, through subsequent discussions with the attorney, that a more likely estimate of the range of loss falls between $90,000 to $115,000. What type of financial statement disclosure do you believe is required in that case?
(e) What if you learn that management has pertinent information available about the case (and the case is deemed material) but refuses to share that information with you? Prepare a draft of the auditor's report that you would issue in that scenario.
(f) Assume that you convinced management to disclose the contingency in the footnotes to the December 31, 2014 financial statements and that your audit report on those financial statements was a standard, unqualified audit report. What would your responsibilities be if you learned two months after the issuance of the report that Murchison settled the case for $340,000?
(g) Assume that the settlement of the litigation prohibits future sales of MEDTECH software. What implication would that have on the auditor's report on the December 31, 2014 financial statements?
(h) Assume that Custer & Custer was delayed a month in completing the collection of audit evidence. What actions would be appropriate relating to gathering evidence about potential contingencies?