Because the audit report reflects the degree of responsibility assumed, the independent auditor must exercise caution in choosing the appropriate wording. The following report alternatives are available.

1. Unmodified opinion;

2. Opinion qualified because of departure from PFRS;

3. Opinion qualified for lack of evidence (scope restriction);

4. Disclaimer of opinion - scope restriction;

5. Disclaimer of opinion uncertainty;

6. Adverse opinion;

7. Explanatory paragraph following opinion paragraph:

1. Uncertainty;

2. Doubt as to ability to continue as a going concern;

3. Emphasis of a matter;

4. Agreed-upon departure from accounting principle;

5. Change in accounting principle.

Required:

For each of the situations described below, indicate by number and letter the appropriate form & audit report. More than one choice may apply to a given situation. For example, an unmodified opinion followed by an explanatory paragraph for emphasis of matter would be answered as I,

A. The auditors were able to gather all of the evidence necessary to support an audit opinion; the financial statements contain no material departures from PFRS; but oil and gas reserve information required by ASC as supplemental information has been omitted.

B. The client refused to capitalize certain leases meeting one or more of the criteria that define financing leases. The auditors are also in doubt as to the recoverability of purchased patents, the costs of which are material in relation to the company's net assets.

C. The client refused the auditors' request to confirm trade accounts receivable. The unaudited balance in this account is significant in relation to total assets, and the auditors were unable to satisfy themselves by other means.

D. Certain subsidiary companies were audited by other independent CPAs. The principal auditors decided to divide responsibility.

E. A land development company decided to write up all of its assets from cost to current market value and recognized the appreciation as a pan of current income. Management believed that the increase in earnings would facilitate a public offering of the company's stock.

F. Although Company A is virtually insolvent, its financial statements are based on the going concern assumption. Given the gravity of the situation, the auditors do not believe that adding an explanatory paragraph is adequate in the circumstances.

G. During the year. Company B changed its method of inventory costing from FIFO to Average Costing. Although proper accounting treatment was accorded the change, management refuses to include a footnote describing the change.

H. Although Company C permitted the auditors to confirm accounts receivable, the results of the confirmation process were disappointing. Only 20% of customers responded, and more than half

of these were unable to confirm their outstanding balances. The auditors were unable to satisfy themselves by other means. In addition, Company C completed several significant transactions with

related parties. Although the auditors determined that these transactions were recorded correctly and adequately disclosed in the financial statements, they wish to bring the existence of the

transactions to the attention of the stockholders.

l. Company D debited significant amounts of leasehold improvements to repairs expenses. The auditors determined that these expenditures should have been debited to asset accounts and amortized over the remaining term of the lease. Management refuses to accept the auditors' proposed adjustments. In addition, the company's liquidity position is so precarious that the auditors are not certain as to whether it will be able to meet its obligations in the short run.

J. For many years. Company G followed the practice of recognizing revenue at the point of sale. Given increasing uncertainty regarding collectibility, the company, with the auditors' approval, decided to change to the installment method of accounting for sales. Rather than recognizing the cumulative effect of oldie change as a component of current income, however, the company decided to debit the amount to beginning retained earnings and restate prior earnings to reflect the new method. The auditors agreed with this depafiure on the basis that, given the magnitude of accounts receivable at the date of change, the designated treatment would cause the financial statements to be materially misleading. Also, in conducting the current examination, the auditors were unable to obtain sufficient evidence to evaluate the reasonableness of the company's provision for the inventory obsolescence.

K. Company H changed its method of depreciation from straight-line to the appraisal method for all its property, plant, and equipment. Footnote No. 8 fully described the change and the effect on current earnings. Property, plant, and equipment comprises 60% of the company's total assets.

L. Company X changes its method of determining inventory cost from identity to moving average. Footnote No. 6 fully described the change and its impact on current earnings.

M. Company X changed its method of accounting for retirement benefits to conform to the PAS. In addition. The company has sustained significant losses over the past three years, raising doubts concerning short-term debt-paying ability.