17-38 For each of the following brief scenarios, assume that you are reporting on a clients current year financial statements. Reply as to the type or types of opinion possible in the circumstance.

S Unmodified Standard

U Unmodified with emphasis-of-matter or other-matter paragraph

Q Qualified

D Disclaimer

A Adverse

Since more than one report may be possible in several of the circumstances, a second opinion column is added for each circumstance. In certain cases, you will not need to use the second column. Do not read more into the circumstance than what is presented, and do not consider the possibility of an auditors discretionary emphasis-of-matter paragraph being added to the audit report. Unless stated otherwise, assume that the information presented is material to the financial statements. If the situation doesnt tell you whether a misstatement pervasively misstates the financial statements or doesnt list a characteristic that indicates pervasiveness, two reports may be possible.

Situation Opinion Opinion

1. A company in its first year of existence values its inventory at current replacement cost. Although you believe that the inventory costs do not approximate any GAAP inventory valuation method. The difference involved is material, but not pervasively to the financial statements.

2. Due to recurring operating losses and working capital deficiencies, you have substantial doubt about an entitys ability to continue as a going concern for a reasonable period of time. The notes to the financial statements adequately disclose the substantial doubt situation.

3. You have discovered that a client made illegal payoffs to a candidate for president of the United States. You are unable to determine the amounts associated with the payoffs because of the clients inadequate record retention policies. The client has added a note to the financial statements to describe this information, and has stated that the amounts of the payments are not determinable.

4. In auditing the long-term investments account of a new client, you find that a 2,000,000 contingent liability exists that is material to the consolidated company. It is probable that this contingent liability will be resolved with a material loss in the future. Although, no adjusting entry has been made, the client has provided a note to the financial statements that describes the matter in detail and includes the $2 million estimate.

5. A client is issuing two years of comparative financial statements. The first year was audited by other auditors who are not being asked to reissue their audit report.

6. An entity changes its depreciation method for production equipment from the straight line to the units-of-production method based on hours of utilization. You concur with the change.

7. A client has changed the method it uses to calculate postemployment benefits from one acceptable method to another acceptable method. The effect of the change is immaterial this year, but is expected to be material in the future.

8. Component auditors have audited a subsidiary of your client as part of a group audit. You have decided to rely upon the component auditors work.

9. A client omits note disclosure related to significant accounting policies that the auditors believe to be fundamental to users understanding of the financial statements.

10. A client does not count its year-end inventory. The auditors are unable to obtain sufficient appropriate audit evidence related to the inventory, and they consider inventory to represent an extremely substantial proportion of the financial statements.