Consider the following independent and material situations:

1. The client, with reasonable justification, has changed its method of accounting for all factory and office equipment. The effect of this change is not material to the current year financial reports, but is likely to have a material effect in future years. The client will not disclose this change because of the immaterial effect on the current year financial reports.
2. The audit was staffed primarily by three new audit assistants and a relatively inexperienced audit senior. The audit manager found numerous errors during the conduct of the audit and developed very long “to-do” lists for all members of the audit team to complete before the audit was concluded. Although the manager originally doubted the staff’s understanding of the audit procedures, by the time the audit was finished, he concluded that the new auditors did understand the client and the audit process and that no material errors existed in the financial reports.
3. The client issues financial reports that present financial position and results of operations, but omits the related statement of cash flows. Management, however, did disclose in the notes to the financial statements that it is of the opinion that the statement of cash flows would not be a relevant statement to disclose.
4. The client is a defendant in a lawsuit alleging infringement of certain patent rights. Management, however, cannot reasonably estimate the ultimate outcome of the litigation. The auditor believes that there is a reasonable possibility of a significant material loss, but the lawsuit is adequately disclosed in the notes to the financial statements.

Required:

For each of the situations (i) to (iv) above:

a. Indicate the type of audit opinion you would issue.

b. Give reasons for issuing the particular audit opinion.

Answer rating: 100% (QA)

Answer Explanation Situation i Unqualified opinion i The client has change the method of accounting ... View the full answer