Charles Burke, CPA, has completed field work for his examination of the Willingham Corporation for the year ended December 31, 19X0, and now is in the process of determining whether to modify his report. Presented below are two, independent, unrelated situations which have arisen.

{Situation \(I\)}

In September 19X0, a lawsuit was filed against Willingham to have the court order it to install pollution-control equipment in one of its older plants. Willingham's legal counsel has informed Burke that it is not possible to forecast the outcome of this litigation; however. Willingham's management has informed Burke that the cost of the pollution-control equipment is not economically feasible and that the plant will be closed if the case is lost. In addition, Burke has been told by management that the plant and its production equipment would have only minimal resale values and that the production that would be lost could not be recovered at other plants.

{Situation II}

During \(19 \times 0\), Willingham purchased a franchise amounting to 20 percent of its assets for the exclusive right to produce and sell a newly patented product in the northeastern United States. There has been no production in marketable quantities of the product anywhere to date. Neither the franchisor nor any franchisee has conducted any market research with respect to the product.

Required:

In deciding the type of report modification, if any, Burke should take into account such considerations as follows:

a. Relative magnitude.

b. Uncertainty of outcome.

c. Likelihood of error.

d. Expertise of the auditor.

e. Pervasive impact on the financial statements.

f. Inherent importance of the item.
Discuss Burke's type of report decision for each situation in terms of the above and other appropriate considerations. Assume each situation is adequately disclosed in the notes to the financial statements. Each situation should be considered independently. In discussing each situation, ignore the other. It is not necessary for you to decide the type of report which should be issued.