16-47 (Selecting the Proper Audit Opinion and Report Modification)RequiredAudit situations 1 through 8 present various independent factual situations an auditormight encounter in conducting an audit. List A represents the types of opinionsthe auditor ordinarily would issue, and List B represents the report modifications (if any) that would be necessary. For each situation, select one response from List A and one from List B. Select, as the best answer for each item, the action the auditor normally would take. Items from either list may be selected once, more than once, or not at all.Assume the following: The auditor is independent. The auditor previously expressed an unqualified opinion on the prior-year financialstatements. Only single-year (not comparative) statements are presented for the current year. The conditions for an unqualified opinion exist unless contradicted in the factual situations. The conditions stated in the factual situations are material. No report modifications are to be made except in response to the factual situation.Audit Situations:1. The financial statements present fairly, in all material respects, the financial position,results of operations, and cash flows in conformity with GAAP.2. In auditing the Long-Term Investments account, an auditor is unable to obtain audited financial statements for an investee located in a foreign country. The auditor concludes that sufficient competent evidential matter regarding this investment cannot be obtained but is not significant enough to disclaim an opinion.3. Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. However, the financial statement disclosures concerning these matters are adequate.4. The principal auditor decides to refer to the work of another auditor, who auditeda wholly owned subsidiary of the entity and issued an unqualified opinion.5. An entity issues financial statements that present financial position and resultsof operations but omits the related statement of cash flows.Management disclosesin the notes to the financial statements that it does not believe the statement of cash flows to be a useful statement.6. An entity changes its depreciation method for production equipment from thestraight-line to a units-of-production method based on hours of utilization.The auditor concurs with the change, although it has a material effect on the comparability of the entity’s financial statements.7. An entity is a defendant in a lawsuit alleging infringement of certain patent rights. However, management 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.8. An entity discloses certain lease obligations in the notes to the financial statements.The auditor believes that the failure to capitalize these leases is a departure from GAAP.List A-Types of Opinionsa. A qualified opinionb. An unqualified opinionc. An adverse opiniond. A disclaimer of opinione. Either a qualified opinion or an adverse opinionf. Either a disclaimer of opinion or a qualified opiniong. Either an adverse opinion or a disclaimer of opinionList B-Report Modificationsh. Describe the circumstances in an explanatory paragraph preceding the opinionparagraph without modifying the three standard paragraphs.i. Describe the circumstances in an explanatory paragraph following the opinionparagraph without modifying the three standard paragraphs.j. Describe the circumstances in an explanatory paragraph preceding the opinionparagraph and modifying the opinion paragraph.k. Describe the circumstances in an explanatory paragraph following the opinionparagraph and modifying the opinion paragraph.l. Describe the circumstances in an explanatory paragraph preceding the opinionparagraph and modifying the scope and opinion paragraphs.m. Describe the circumstances in an explanatory paragraph following the opinionparagraph and modifying the scope and opinion paragraphs.n. Describe the circumstances within the scope paragraph without adding an explanatoryparagraph.o. Describe the circumstances within the opinion paragraph without adding an explanatory paragraph.p. Describe the circumstances within the scope and opinion paragraphs without adding an explanatory paragraph.q. Describe the circumstances in the introductory paragraph without adding an explanatory paragraph, and modify the wording of the scope and opinion paragraphs.r. Issue the standard auditor’s report without modification.*16-47 (Selecting the Proper Audit Opinion and Report Modification)RequiredAudit situations 1 through 8 present various independent factualsituations an auditormight encounter in conducting an audit. List A represents the types ofopinionsthe auditor ordinarily would issue, and List B represents the reportmodifications (if any) that would be necessary. For each situation,select one response from List A and one from List B. Select, as the bestanswer for each item, the action the auditor normally would take. Itemsfrom either list may be selected once, more than once, or not at all.Assume the following:⢠The auditor is independent.⢠The auditor previously expressed an unqualified opinion on theprior-year financialstatements.⢠Only single-year (not comparative) statements are presented for thecurrent year.⢠The conditions for an unqualified opinion exist unless contradictedin the factual situations.⢠The conditions stated in the factual situations are material.⢠No report modifications are to be made except in response to thefactual situation.Audit Situations:1. The financial statements present fairly, in all material respects,the financial position,results of operations, and cash flows in conformity with GAAP.2. In auditing the Long-Term Investments account, an auditor is unableto obtain audited financial statements for an investee located in aforeign country. The auditor concludes that sufficient competentevidential matter regarding this investment cannot be obtained but isnot significant enough to disclaim an opinion.3. Due to recurring operating losses and working capital deficiencies,an auditor has substantial doubt about an entityâs ability to continueas a going concern for a reasonable period of time. However, thefinancial statement disclosures concerning these matters are adequate.4. The principal auditor decides to refer to the work of anotherauditor, who auditeda wholly owned subsidiary of the entity and issued an unqualifiedopinion.5. An entity issues financial statements that present financial positionand resultsof operations but omits the related statement of cash flows.Managementdisclosesin the notes to the financial statements that it does not believe thestatement of cash flows to be a useful statement.6. An entity changes its depreciation method for production equipmentfrom thestraight-line to a units-of-production method based on hours ofutilization.The auditor concurs with the change, although it has a material effecton the comparability of the entityâs financial statements.7. An entity is a defendant in a lawsuit alleging infringement ofcertain patent rights. However, management cannot reasonably estimatethe ultimate outcome of the litigation.The auditor believes that thereis a reasonable possibility of a significant material loss, but thelawsuit is adequately disclosed in the notes to the financialstatements.8. An entity discloses certain lease obligations in the notes to thefinancial statements.The auditor believes that the failure to capitalize these leases is adeparture from GAAP.List AâTypes of Opinionsa. A qualified opinionb. An unqualified opinionc. An adverse opiniond. A disclaimer of opinione. Either a qualified opinion or an adverse opinionf. Either a disclaimer of opinion or a qualified opiniong. Either an adverse opinion or a disclaimer of opinionList BâReport Modificationsh. Describe the circumstances in an explanatory paragraph preceding theopinionparagraph without modifying the three standard paragraphs.i. Describe the circumstances in an explanatory paragraph following theopinionparagraph without modifying the three standard paragraphs.j. Describe the circumstances in an explanatory paragraph preceding theopinionparagraph and modifying the opinion paragraph.k. Describe the circumstances in an explanatory paragraph following theopinionparagraph and modifying the opinion paragraph.l. Describe the circumstances in an explanatory paragraph preceding theopinionparagraph and modifying the scope and opinion paragraphs.m. Describe the circumstances in an explanatory paragraph following theopinionparagraph and modifying the scope and opinion paragraphs.n. Describe the circumstances within the scope paragraph without addingan explanatoryparagraph.o. Describe the circumstances within the opinion paragraph withoutadding an explanatory paragraph.p. Describe the circumstances within the scope and opinion paragraphswithout adding an explanatory paragraph.q. Describe the circumstances in the introductory paragraph withoutadding an explanatory paragraph, and modify the wording of the scope andopinion paragraphs.r. Issue the standard auditorâs report without modification.