List A represents the types of opinions the auditor ordinarily would issue, and List B represents a portion of the needed report modifications — whether an additional paragraph will be included. For each situation, select one (1) response from List A and one (1) from List B. Select the best answers for each item the action the auditor would normally take. The types of opinions in List A and the report modifications in List B may be selected once, more than once, or not at all. Assume the following: • The auditor is independent. • The auditor previously expressed an unmodified opinion on the prior year’s financial statements. • Only single-year (not comparative) statements are presented for the current year. • The conditions for an unmodified opinion exist unless contradicted by the facts. • The conditions stated in the items to be answered are material, unless otherwise indicated. • Each item to be answered is independent of the others. • No report modifications are to be made except in response to the factual situation. • The auditor will not treat a situation as an “emphasis of a matter” in what remains an unmodified audit report unless it is one of those circumstances specifically illustrated in the Professional Standards as an example of a matter an auditor may wish to emphasize. List A Report modifications A. Qualified opinion or adverse opinion B. Qualified opinion or disclaimer of opinion C. Either an adverse opinion or a disclaimer of opinion D. Qualified opinion E. Unmodified opinion F. An adverse opinion G. A disclaimer of opinion Types of opinions List B H. Basis for Modification paragraph I. Emphasis of Matter paragraph J. Other Matter paragraph K. No additional paragraph L. Describe the circumstances within the opinion paragraph Types of Opinions (A–G) Additional Paragraph (H–L) 1. Blas hired an actuary to assist in corroborating GELAY’s complex pension calculations concerning accrued pension liabilities that account for 35% of the client’s total liabilities. The actuary’s findings are reasonably close to GELAY’s calculations and support the financial statements. 2. GELAY holds a note receivable consisting of principal and accrued interest receivable in 20X4. The note’s maker recently filed a voluntary bankruptcy petition, but GELAY failed to reduce the recorded value of the note to its net realizable value, which is approximately 20% of the recorded amount. 3. Blas was engaged to audit a client’s financial statements after the annual physical inventory count. The accounting records were not sufficiently reliable to enable him to become satisfied as to the year-end inventory balances. 4. Blas found an immaterial adjustment relating to inventory. GELAY has refused to adjust the financial statements to reflect this immaterial item. 5. GELAY’s financial statements do not disclose certain long-term lease obligations. Blas determined that the accounting standards require the omitted disclosures. 6. Blas decided not to take responsibility for the work of another CPA who audited a wholly-owned subsidiary of GELAY. The total assets and revenues of the subsidiary represent 27% and 28%, respectively, of the related consolidated totals. 7. GELAY changed its method of accounting for the cost of inventories from first-in, first-out (FIFO) to last-in, first-out (LIFO). Blas concurs with the change, although it has a material effect on the comparability of the financial statements. 8. Due to losses and adverse key financial ratios, Blas has substantial doubt about GELAY’s ability to continue as a going concern for a reasonable period. The client has adequately disclosed its financial difficulties in a note to its financial statements. Also, Blas has ruled
List A represents the types of opinions the auditor ordinarily would issue, and List B represents a portion of the
needed report modifications — whether an additional paragraph will be included. For each situation, select one
(1) response from List A and one (1) from List B. Select the best answers for each item the action the auditor
would normally take. The types of opinions in List A and the report modifications in List B may be selected once,
more than once, or not at all.
Assume the following:
• The auditor is independent.
• The auditor previously expressed an unmodified opinion on the prior year’s financial statements.
• Only single-year (not comparative) statements are presented for the current year.
• The conditions for an unmodified opinion exist unless contradicted by the facts.
• The conditions stated in the items to be answered are material, unless otherwise indicated.
• Each item to be answered is independent of the others.
• No report modifications are to be made except in response to the factual situation.
• The auditor will not treat a situation as an “emphasis of a matter” in what remains an unmodified audit
report unless it is one of those circumstances specifically illustrated in the Professional Standards as an
example of a matter an auditor may wish to emphasize.
List A
Report modifications
A. Qualified opinion or adverse opinion
B. Qualified opinion or disclaimer of opinion
C. Either an adverse opinion or a disclaimer of
opinion
D. Qualified opinion
E. Unmodified opinion
F. An adverse opinion
G. A disclaimer of opinion
Types of opinions
List B
H. Basis for Modification paragraph
I. Emphasis of Matter paragraph
J. Other Matter paragraph
K. No additional paragraph
L. Describe the circumstances within
the opinion paragraph
Types of
Opinions
(A–G)
Additional
Paragraph
(H–L)
1. Blas hired an actuary to assist in corroborating GELAY’s complex
pension calculations concerning accrued pension liabilities that account
for 35% of the client’s total liabilities. The actuary’s findings are
reasonably close to GELAY’s calculations and support the financial
statements.
2. GELAY holds a note receivable consisting of principal and accrued
interest receivable in 20X4. The note’s maker recently filed a voluntary
bankruptcy petition, but GELAY failed to reduce the recorded value of
the note to its net realizable value, which is approximately 20% of the
recorded amount.
3. Blas was engaged to audit a client’s financial statements after the
annual physical inventory count. The accounting records were not
sufficiently reliable to enable him to become satisfied as to the year-end
inventory balances.
4. Blas found an immaterial adjustment relating to inventory. GELAY has
refused to adjust the financial statements to reflect this immaterial item.
5. GELAY’s financial statements do not disclose certain long-term lease
obligations. Blas determined that the accounting standards require the
omitted disclosures.
6. Blas decided not to take responsibility for the work of another CPA who
audited a wholly-owned subsidiary of GELAY. The total assets and
revenues of the subsidiary represent 27% and 28%, respectively, of the
related consolidated totals.
7. GELAY changed its method of accounting for the cost of inventories
from first-in, first-out (FIFO) to last-in, first-out (LIFO). Blas concurs with
the change, although it has a material effect on the comparability of the
financial statements.
8. Due to losses and adverse key financial ratios, Blas has substantial
doubt about GELAY’s ability to continue as a going concern for a
reasonable period. The client has adequately disclosed its financial
difficulties in a note to its financial statements. Also, Blas has ruled
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