For the following independent situations, assume you are the audit partner on the engagement.

1. Kieko Corporation has prepared financial statements but has decided to exclude the cash flow statement. Manage¬ ment explains to you that the users of their financial statements find that particular statement confusing and prefer not to have it included.

2. Jet Stream Airlines, Inc. has been audited by your firm for ten years. In the past three years their financial condi¬ tion has steadily declined. In the current year, for the first time, the current ratio is below 2:1, which is the mini¬ mum requirement specified in Jet Stream's major loan agreement. You now have reservations about the ability of Jet Stream to continue in operation for the next year.

3. Approximately 20 percent of the audit for Furtney Farms, Inc. was performed by a different public account¬ ing firm, selected by you. You have reviewed its working papers and believe it did an excellent job on its portion of the audit. Nevertheless, you are unwilling to take com¬ plete responsibility for its work.

4. The controller of Fair City Hotels Co. Ltd. will not allow you to confirm the receivable balance from two of its

^major customers. The amount of the receivable is mater¬ ial in relation to Fair City's financial statements. You are unable to satisfy yourself as to the receivable balance by alternative procedures.

5. In the last three months of the current year, Oil Refining Corp. decided to change direction and go significantly into the oil-drilling business. Management recognizes that this business is exceptionally risky and could jeopar¬ dize the success of its existing refining business, but there are significant potential rewards. During the short period of operation in drilling, the company has had three dry wells and no successes. The facts are adequately dis¬ closed in footnotes.

Required a.For each situation, identify which of the conditions requiring modification of or a deviation from an unqual¬ ified standard report is applicable.

b. State the level of materiality as immaterial, material, or material and pervasive. If you cannot decide the level of materiality, state the additional information needed to make a decision.

c. Given your answers in parts

(a) and (b), identify the appropriate auditor's report from the following choices:
1. Unqualified —standard wording 2. Qualified opinion only—except for 3. Scope and opinion qualified 4. Denial 5. Adverse