BM1909

Name: Date: Score:

ACTIVITY

Assume that items 1–8 are situations that Aquino, CPA, has encountered during his audit of ABC, Inc., a private
company.

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 as 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 List B
Types of opinions Report modifications
A. Qualified opinion or adverse opinion H. Basis for Modification paragraph
B. Qualified opinion or disclaimer of opinion I. Emphasis of Matter paragraph
C. Either an adverse opinion or a disclaimer of J. Other Matter paragraph
opinion
D. Qualified opinion K. No additional paragraph
E. Unmodified opinion L. Describe the circumstances within
the opinion paragraph
F. An adverse opinion
G. A disclaimer of opinion

Types of Additional
Opinions Paragraph
(A–G) (H–L)
1. Aquino hired an actuary to assist in corroborating ABC’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 ABC’s calculations and support the financial
statements.
2. ABC holds a note receivable consisting of principal and accrued interest
receivable in 20X4. The note’s maker recently filed a voluntary
bankruptcy petition, but ABC failed to reduce the recorded value of the
note to its net realizable value, which is approximately 20% of the
recorded amount.
3. Aquino was engaged to audit a client’s financial statements after the
annual physical inventory count. The accounting records were not

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 BM1909

Types of Additional
Opinions Paragraph
(A–G) (H–L)
sufficiently reliable to enable him to become satisfied as to the year-end
inventory balances.
4. Aquino found an immaterial adjustment relating to inventory. ABC has
refused to adjust the financial statements to reflect this immaterial item.
5. ABC’s financial statements do not disclose certain long-term lease
obligations. Aquino determined that the accounting standards require the
omitted disclosures.
6. Aquino decided not to take responsibility for the work of another CPA
who audited a wholly-owned subsidiary of ABC. The total assets and
revenues of the subsidiary represent 27% and 28%, respectively, of the
related consolidated totals.
7. ABC changed its method of accounting for the cost of inventories from
first-in, first-out (FIFO) to last-in, first-out (LIFO). Aquino 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, Aquino has substantial
doubt about ABC’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, Aquino has ruled out the use of a
disclaimer of opinion.

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