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Officers of Richnow Company do not wish to disclose information about a product liability lawsuit filed by a customer seeking $500,000 in damages. They believe
Officers of Richnow Company do not wish to disclose information about a product liability lawsuit filed by a customer seeking $500,000 in damages. They believe the suit is frivolous and without merit. Outside counsel is more cautious. The audit team insists on disclosure. Angered, Richnow's chair of the board of directors threatens to sue the CPA firm if a standard (unmodified) report is not issued within three (3) days. How should the auditors handle this situation? Please refer to Chapter 12 of the text when formulating your response to this discussion. You should consider: (1) whether the auditors should resign from the engagement, (2) whether the auditors should disclose the litigation in their report, if yes what type of report should be issued, and (3) does failure to disclose the litigation result in a departure from GAAP
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