For each of the independent situations presented below, state what type of audit report should be issued. Briefly explain your rationale. Finally, if your report would be other than the standard unqualified report, state which paragraphs, if any, of the standard audit report would be changed.
A. Grinner and Greeter, CPAs, were engaged to perform an audit of the financial statements of Happy, Inc. The management of Happy would not allow Grinner and Greeter to confirm any of the accounts receivable. All other audit procedures were performed as considered necessary by Grinner and Greeter and no other problems were discovered. However, Grinner and Greeter were unable to satisfy themselves as to the balance in accounts receivable.
A. The client has imposed a scope limitation on Grinner and Greeter. The type of report issued depends upon the materiality of accounts receivable and the likelihood that a potential error would be material or significantly material.
If the account receivable balance were insignificant and immaterial, then an unqualified report could be issued. If the likelihood that a potential error would be material or significantly material, then an opinion qualified as to scope or a disclaimer of opinion, respectively, would be appropriate.
For a qualified audit report, both the scope paragraph and the opinion paragraph would be modified using words such as "except for" or "except that" and referring to the reservation paragraph. A reservation paragraph that explains the scope limitation should be inserted between the scope and opinion paragraphs.
For a disclaimer of opinion, both the scope paragraph and the opinion paragraph would be modified and referenced to the reservation paragraph. A reservation paragraph that explains the scope limitation would be inserted between the scope and opinion paragraphs. The opinion paragraph would be modified to state that the auditor is "unable to express an opinion."
B. Because Johnson Manufacturing has not properly recorded a loss and a liability, the financial statements are not in accordance with GAAP. Therefore, depending on the materiality level, Tick and Tie should issue either a qualified opinion or an adverse opinion. In either case, a reservation paragraph that explains the GAAP departure should be inserted between the scope and opinion paragraphs. In the case of a qualified opinion, the opinion paragraph should be modified by using words such as "except for" or "except as" and by referring to the reservation paragraph. In the case of an adverse opinion, the opinion paragraph should be modified by using the words "these financial statements do not present fairly" and by referring to the reservation paragraph.
B. Tick and Tie, CPAs, were performing their annual audit of Johnson Manufacturing Company. Johnson is currently being sued for $2,000,000 related to an alleged defective product sold to a customer. Johnson's lawyer told Tick and Tie that it is likely that Johnson will lose the suit and have to pay the entire $2,000,000. The management of Johnson has included information about the lawsuit in the footnotes. However, they have not recorded any loss in the income statement or liability in the balance sheet.

Question

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The Answer of For each of the independent situations presented below, state what type of audit report should be issued. Briefly explain your rationale. Finally, if your report would be other than the standard unqualified report, state which paragraphs, if any, of the standard audit report would be changed.
A. Grinner and Greeter, CPAs, were engaged to perform an audit of the financial statements of Happy, Inc. The management of Happy would not allow Grinner and Greeter to confirm any of the accounts receivable. All other audit procedures were performed as considered necessary by Grinner and Greeter and no other problems were discovered. However, Grinner and Greeter were unable to satisfy themselves as to the balance in accounts receivable.
A. The client has imposed a scope limitation on Grinner and Greeter. The type of report issued depends upon the materiality of accounts receivable and the likelihood that a potential error would be material or significantly material.
If the account receivable balance were insignificant and immaterial, then an unqualified report could be issued. If the likelihood that a potential error would be material or significantly material, then an opinion qualified as to scope or a disclaimer of opinion, respectively, would be appropriate.
For a qualified audit report, both the scope paragraph and the opinion paragraph would be modified using words such as "except for" or "except that" and referring to the reservation paragraph. A reservation paragraph that explains the scope limitation should be inserted between the scope and opinion paragraphs.
For a disclaimer of opinion, both the scope paragraph and the opinion paragraph would be modified and referenced to the reservation paragraph. A reservation paragraph that explains the scope limitation would be inserted between the scope and opinion paragraphs. The opinion paragraph would be modified to state that the auditor is "unable to express an opinion."
B. Because Johnson Manufacturing has not properly recorded a loss and a liability, the financial statements are not in accordance with GAAP. Therefore, depending on the materiality level, Tick and Tie should issue either a qualified opinion or an adverse opinion. In either case, a reservation paragraph that explains the GAAP departure should be inserted between the scope and opinion paragraphs. In the case of a qualified opinion, the opinion paragraph should be modified by using words such as "except for" or "except as" and by referring to the reservation paragraph. In the case of an adverse opinion, the opinion paragraph should be modified by using the words "these financial statements do not present fairly" and by referring to the reservation paragraph.
B. Tick and Tie, CPAs, were performing their annual audit of Johnson Manufacturing Company. Johnson is currently being sued for $2,000,000 related to an alleged defective product sold to a customer. Johnson's lawyer told Tick and Tie that it is likely that Johnson will lose the suit and have to pay the entire $2,000,000. The management of Johnson has included information about the lawsuit in the footnotes. However, they have not recorded any loss in the income statement or liability in the balance sheet.

For Each of the Independent Situations Presented Below, State What