Choices:

A - Unmodified

B - Unmodified with Emphasis of a matter paragraph

C - Modified / Qualified

D - Adverse

E - Disclaimer

1. During the course of his audit of the financial statements of a corporation for the purpose of expressing an opinion on the statements, a CPA is refused permission to inspect the minutes book. The corporation secretary instead offers to give the CPA a certified copy of resolutions and actions relating to accounting matters.

2. During 2015, the research staff of Maligalig Research Corporation devoted its entire efforts toward developing a new pollution-control device. All costs that could be attributed directly to the projects were accounted for as deferred charges and classified on the balance sheet at December 31, 2015, as a non-current assets. In the course of his audit of the corporation's 2015 financial statements, Sam, CPA, found persuasive evidence that the research conducted to date would probably result in a marketable product. The deferred research charges are significantly material in relation to both income and total assets.

3. On January 2, 2016, the Reebook Auto Supply Company received a notice from its primary supplier that effective immediately, all wholesale prices would be increased 10 percent. On the basis of the notice, Reebook Auto Supply revalued its December 31, 2015, inventory to reflect the higher costs. The inventory constituted a material proportion of total assets; however, the effect of the revaluation was material to current assets but not to total assets or net income. The increase in valuation is adequately disclosed in the notes to financial statements.

4. You were engaged to audit Stealman Company's financial statements after the close of the company's fiscal year. Because you were not engaged until after the balance sheet date, you were not able to physically observe inventory, which is highly material. On the completion of your audit, you are satisfied that Stealman's financial statements are presented fairly, including inventory about which you were able to satisfy yourself by the use of alternative audit procedures.

5. A CPA has completed his audit of the financial statements of a bus company for the year ended December 31, 2015. Prior to 2015, the company had been depreciating its buses over a 10-year period. During 2015, the company determined that a more realistic estimated life for its buses was 12 years and computed the 2015 depreciation on the basis of the revised estimate. The CPA has satisfied himself that the 12-year life is reasonable. The company has adequately disclosed the change in accounting estimate of its buses and the effect of the change on 2015 income in a note to the financial statement.

6. As discussed in Note 9 to the financial statements, the company is defendant in a lawsuit alleging infringement of certain patent rights and claiming damages. Discovery proceedings are in progress. The ultimate outcome of the litigation cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication has been made in the accompanying financial statements.

7. Miller Company, a trader, uses the first-in, first-out method of costing for its international subsidiary's inventory and the last-in, first-out method of costing for its domestic inventory. Both inventories are significantly material to total current assets but not to the total assets of the company.

8. Kim, an independent auditor, was engaged to perform an examination of the financial statements of Sue Incorporated, one month after its fiscal year had ended. Although the inventory count was not observed by Kim, and accounts receivable were not confirmed by direct communication with debtors, Kim was able to gain satisfaction by applying alternative auditing procedures. After the financial statements was issued, Sue decided to sell shares of a subsidiary that accounts for 30% of its revenue and 25% of its net income.

9. X company issued a 10% mortgage note on October 1, 2015, with a term of 10 years. Terms of the note give the holder the right to demand immediate payment if the entity fails to make a monthly interest payment within 10 days from the date the payment is due. On December 31, 2018, the entity is 6 months behind in making the required payment which constitute a material part of its cash flows. Furthermore, the management's plan of action for next accounting period includes the disposal of assets and obtaining additional capital in order to pay the loan. This matter was adequately disclosed in the notes to financial statement.

10.A Company, a major and principal supplier of Z Company, has recently filed for bankruptcy and will not be anymore to continue supplying starting January 1 of the next accounting period. Z Company imports 90% of its supplies from A Company which constitute 80% of its current assets and 60% of its total assets. The independent auditor of Z Company has advised Z to report the financial statement at year-end at their liquidation values. However, Z's management refuses to do so because it believes that it can find another major supplier before the year ends.