You have assigned your assistant to the audit of the Bell Sales Company's fire insurance policies. All routine audit procedures with regard to the fire insurance register have been completed (i.e., vouching, footing, examination of canceled checks, computation of insurance expense and repayment, tracing of expense charges to appropriate expense accounts, etc.) After reviewing your assistant's work papers, you concur in the conclusion that the insurance coverage against loss by fire is inadequate and that, if loss occurs, the company may have insufficient assets to liquidate its debts. After a discussion with you, management refuses to increase the amount of insurance coverage.

1. What mention will you make of this condition and contingency in your standard report? Why?

2. What effect will this condition and contingency have upon your opinion? Give reasons for your position.