a departure from GAAP, or no opinion modification. Each choice may be used once, more than once, or not at all. Situation 1. An entity is facing litigation in an area that has very little precedent. After examining the relevant evidence, management and the auditor determine that a loss is probable, and the entity does not have enough current cash to cover the estimated loss. The loss is properly reported in the financial statements. 2. The estimate used by management for the allowance for credit losses was inadequate and caused a material misstatement of the entity's financial position. 3. An entity has a 10% interest in another local business. The entity does not elect the fair value option and accounts for this investment using the equity method. The difference that arises compared with accounting under the fair value method is material. 4. Management's privacy policy prevented the auditors from accessing payroll records during their audit. 5. Both management and the auditor agree that the entity will win a large settlement as a result of the litigation the entity is currently pursuing. However, neither the auditor nor management can reasonably predict the amount of the settlement. Answer E E