1) For each of the following situations, describe how the auditor should modify the audit report for the firm's financial statements and provide an explanation of why you made the choice you did. Just cover the report on the financial statements and ignore any reference to the report on internal controls. By "modify the audit report," I mean what modifications the auditor would make to any paragraph of the report because of the information described. Make sure your answer either states clearly that no modifications to any paragraph are needed and explains why or describes what modifications would be needed to which paragraphs of the report and explains why.

a) The auditor wishes to emphasize that the auditee has engaged in significant related party transactions. The information on the related party transaction is fully disclosed in the footnotes to the financial statements.

b) The auditor has substantial doubt about the auditee's ability to continue as a going concern, but the circumstances are fully disclosed in the financial statements. Cover both the case where the auditor believes the situation is severe enough to undermine the credibility of the financial statements taken as a whole and where the auditor believes the situation is less severe and the overall credibility of the financial statements are not impaired.

c) The auditee experienced a computer failure during the year being audited and the auditor was not able to verify the ending inventory balance. Inventory is material to the auditee's financial statements, but not pervasively material.

d) You complete the audit of KLM, Inc. and, in your opinion, the financial statements are fairly presented. On the last day of the audit, you discover that one of your supervisors assigned to the audit has a material investment in KLM.