Management believes, and the auditor is satisfied, that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss, but fully discloses the situation in the notes to the financial statements. If the auditor wishes to call attention to the matter and management does not make an accrual in the financial statements, the auditor should issue a(n):
A)qualified report due to a scope limitation.
B)qualified report due to a departure from GAAP.
C)unqualified report with an explanatory paragraph.
D)standard unmodified auditor's report.

Question

Quizplus · Accepted Answer

The situation described in the scenario is an example of a contingency that cannot be reasonably estimated, and therefore, is disclosed in the notes to the financial statements. In such a case, the auditor should issue an unqualified report with an explanatory paragraph drawing attention to the disclosure. This is known as an emphasis-of-matter paragraph and is used to draw attention to matters that are appropriately disclosed in the financial statements. A qualified report is not appropriate in this scenario, as there is no departure from GAAP, and there is no scope limitation.

Management Believes, and the Auditor Is Satisfied, That a Material