The following seven situations are related to possible audit reports and some of the paragraphs that are written in these types of reports. Unless instructed otherwise, assume that the amounts involved are substantial (material) and that the clients are private corporations.

1. Client deviated from GAAP. The deviation is considered substantial (material) and encompassing (pervasive).

2. Client inventory records are deficient, so the auditor has to reach conclusions about the reasonableness of the inventory figure in the financial statements using alternative methods. Once the necessary tests have been done, the auditor is satisfied that he has sufficient evidence to support that amount.

3. During the audit, the auditor obtains enough information that leads him to conclude that the continuity (going concern) of the company he is auditing is doubtful.

4. The main audit firm (group auditor) decides not to assume responsibility for the audit work carried out by another firm (component auditor), which audited one of the subsidiaries 70% owned by the parent company (owned subsidiary). The total assets and total income of the subsidiary represent 5% and 8%, respectively, of the total assets and debts of the parent company audited by the main firm. In turn, the other firm (the secondary) issued an unmodified opinion on the financial statements of the subsidiary.

Use the table provided and the following legends to say the type of report that should be issued in each case, the type of paragraphs or explanatory language that should be used, as well as a brief explanation of why you think so.

Opinion types

A- Adverse N- Denial (disclaimer) C- Qualified U- Not modified

Type of paragraphs that are issued (use acronyms)

Types of modifications or explanations

ENF Add a paragraph to emphasize an issue (explanatory language).

BO Add the paragraph that explains the basis for the modification.

OTHER Make other explanatory languages that requires altering more than one paragraph.

NMC No modifications or changes to the explanatory language apply (for example, in the case of the standard normal report)