For each of the following situations, indicate what type of modification/audit report is most appropriate.

a. There is a scope limitation and it is material. However, the overall financial statements are still presented fairly.

b. There is a departure from GAAP and it is pervasively material.

c. The auditor lacks independence in fact, but not necessarily in appearance.

d. The uncorrected misstatements are immaterial.

Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. In 2020, Fellowes and Associates gained a new client, Health Care Holdings Group (HCHG), which owns 100 percent of the following entities:

• Shady Oaks Centre, a private treatment centre

• Gardens Nursing Home Ltd., a private nursing home

• Total Laser Care Limited (TLCL), a private clinic that specializes in the laser treatment of skin defects

Year end for all HCHG entities is June 30.
You are the audit partner reviewing the audit work papers for HCHG for the year ended June 30, 2020. Today is July 13, 2020, and the audit report is due to be signed in three weeks’ time.

During your review, you note that the fixed-term borrowings of HCHG totalling $75 million are approaching maturity and HCHG does not seem to have renegotiated any terms of refinancing. You are aware, from your experience with other clients, that banks are reluctant to extend financing on the same terms in the current market. The financing of HCHG was historically managed by the group’s treasurer, who left the group six months ago and has not been replaced.

HCHG’s financial controller, who has been with the group for nine months, has advised you that he has been busy renegotiating with some of HCHG’s key suppliers, who recently requested cash on delivery for all orders, rather than extending the normal credit terms.

You are also aware that a fire that occurred in the Shady Oaks cafeteria last week was not adequately covered by insurance. Fortunately, no one was seriously injured in the fire, but the cafeteria was so badly damaged that it had to be closed. When you are discussing this matter with HCHG’s law firm, they reveal that the centre is unlikely to have adequate professional indemnity insurance to meet the current demands of several malpractice cases that have been brought against it in the last 12 months.