Q$1-$ For the following independent situations, assume that you are the audit partner on

the $-$ engagement:

XYZ Electronics is a manufacturer of advanced electrical components. During the year,

changes in the market resulted in a significant decrease in the demand for their products, which

are now being sold significantly below cost. Management refuses to write$-$off the products or

to increase the reserve for obsolescence.

In the last $3$ months of the current year, Oil Refining Company decided to change direction

and go significantly into the oil drilling business. Management recognizes that this business is

exceptionally risky and could jeopardize the success of its existing refining business, but there

are significant potential rewards. During the short period of operation in drilling, the company

has had three dry wells and no successes. The facts are adequately disclosed in footnotes.

Your client, Alfarwog Automotive, has changed from straight$-$line to sum$-$of$-$the$-$years'

digits depreciation. The effect on this year's income is material, and the effect in future years

is likely to be highly material. The facts are adequately disclosed in footnotes.

Toronto Technology Corporation has prepared financial statements but has decided to

exclude the statement of cash flows. Management explains to you that the users of their

financial statements find this statement confusing and prefer not to have it included.

Marseilles Fragrance, Inc., is based in New York but has operations throughout Europe.

Because users of the audited financial statement are international, your audit firm was engaged

to conduct the audit in accordance with U$.$S$.$ auditing standards and International Standards on

Auditing $($ISAs$).$

The controller of Brentwood Industries, Inc., will not allow you to confirm the receivable

balance from two of its major customers. The amounts of the receivables are material in relation

to Brentwood Industries' financial statements. You are unable to satisfy yourself as to the

receivable balances by alternative procedures.

Approximately $20\%$ of the audit of Lumberton Farms, Inc., was performed by a different

CPA firm, selected by you. You have reviewed their audit files and believe they did an excellent

job on their portion of the audit. Nevertheless, you are unwilling to take complete responsibility

for their work.

Required

For each situation, do the following:

a$.$ Identify which of the conditions requiring a modification of or a deviation from an

unqualified standard report is applicable.

b$.$ State the level of materiality as immaterial, material, or highly material. If you cannot decide

the level of materiality, state the additional information needed to make a decision.

c$.$ Given your answers in parts a$.$ and b$.,$ state the appropriate audit report from the following

alternatives $($if you have not decided on one level of materiality in part b$.,$ state the appropriate

report for each alternative materiality level$)$:

$(1)$ Unqualified $-$ standard wording.

$(2)$ Unqualified $-$ explanatory paragraph.

$(3)$ Unqualified $-$ modified wording.

$(4)$ Qualified opinion only $-$ GAAP departure.

$(5)$ Qualified opinion $-$ scope limitation$.$

$(6)$ Disclaimer

$(7)$ Adverse.