Audit situations 1 through 8 present various independent factual situations an auditor might encounter in conducting an audit. List A (following) 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.