The following are independent audit situations for which you are to recommend an appropriate audit report. For each situation, listed as 1 through 6 below, identify the appropriate type of audit report from the list below [a through e} and briey explain the rationale for selecting the report. Appropriate type of audit report: a} h} c} d} El Unqualied opinion, with no report modifications Unqualied opinion, with report modification Qualified opinion Disclaimer of opinion Adverse opinion Audit Situations 1. An audit client has a significant amount of loans receivable outstanding [40% of assets), but has an inadequate internal control system over the loans. The auditor cannot obtain sufficient appropriate evidence to prepare an aging of the loans or to identify the collateral for about T596 of the loans, even though the client states that all loans are collateralized. The auditor sent confirmations to verify the existence of the receivables, but only 10' of the 50 sent were returned. The auditor attempted to verify the other loans by looking at subsequent receipts, but only eight had remitted payments during the month of January, and the auditor wants to wrap up the audit by February 15. The auditor estimates that if only 19 of the 50 loans were correctly recorded, loans would need to be written down by 515 million. During the audit of a large manufacturing company, the auditor did not observe all locations of physical inventory. The auditor chose a random number of sites to visit, and the company's internal auditors visited the other sites. The auditor has condence in the competence and objectivity of the internal auditors. The auditor personally observed only about 20% of the total inventory, but neither the auditor nor the internal auditors noted any exceptions in the inventory [1 roc 338. During the past year, Network Computer, Inc. devoted its entire research and development efforts to develop and market an enhanced version of its stateoftheart telecommunications system. The costs, which were signicant, were capitalized as research and development costs. The company plans to amortize these capitalized costs over the life of the new product. The auditor has concluded that the research to date will likely result in a marketable product. A full description of the research and development, and the costs, is included in a note. The note also describes that basic research costs are expensed as incurred, and the auditor has veried the accuracy of the statement. During the course of the audit of SailAway Company, the auditor noted that the current ratio had dropped to 1.?'5. The company's loan covenant requires the maintenance of a current ratio of 2.0, or the company's debt is immediately due. The auditor and the company have contacted the bank, which is not willing to waive the loan covenant because the company has been experiencing operating losses for the past few years and has an inadequate capital structure. The
