Disagreement with management. Emiko Iamiva, Certified Public Accountant (CPA), audited the Satsuma Company’s earthquake insurance policies. All routine audit procedures with regard to the earthquake insurance register have been completed (i.e. vouching, footing, examination of canceled checks, computation of insurance expense and repayment, tracing of expense charges to appropriate expense accounts, etc.). After the insurance review, Iamiva came to the conclusion that the insurance coverage against loss by earthquake is inadequate and that, if loss occurs, the company may have insufficient assets to liquidate its debts. After a discussion with Iamiva, management refuses to increase the amount of insurance coverage.

Required:

A. What mention will Iamiva make of this condition and contingency in his standard report? Why?

B. What effect will this condition and contingency have upon the audit opinion? Give reasons for your position.