External Auditing Exam 4
Material fluctuations revealed by analytical procedures should be investigated to determine whether they are indicative of material __________ in the financial statements.
Misstatements
A federal securities statute covering registration statements for securities to be sold to the public.
Securities Act of 1933
True or False: Subsequent events that provide additional evidence as to conditions that existed at the balance sheet date may result in adjusting journal entries.
True
True or False: The Securities Act of 1934 includes provisions for criminal charges against persons violating the Act.
True
True or False: The Ultramares v. Touche case established that auditors could be held liable to a known third party for ordinary negligence.
True
Auditors have obtained sufficiently appropriate evidence to conclude that the financial statements are not materially misstated
Unmodified Opinion
A company has not followed generally accepted accounting principles in the recording of its leases. The amounts involved are immaterial.
Unmodified—standard.
A __________ is a list of all specific disclosures required by financial accounting standards.
disclosure checklist
Under the Securities Act of 1933, initial purchasers of securities may sue the auditors for misleading audited financial statements and need not prove that they relied on the financial statements. The burden of proof is on the auditors to prove that they were __________ in the performance of their work.
duly diligent
An __________ is the written contract summarizing the relationship between the auditors and the client.
engagement letter
In estimating the total likely misstatement in the financial statements, the auditors should combine __________ misstatements, projected misstatements, and judgmental misstatements.
factual (known)
When paper paychecks are issued, the company's _____________ should distribute them to the employees of the company.
paymaster
Financial statements that give effect to a subsequent event as though the event had occurred at the balance sheet date are known as __________ financial statements.
pro forma
When damage to another is directly attributable to a wrongdoer's act, __________ is said to exist.
proximate cause
If the auditors conclude that the total misstatement in the financial statements is material, they should request management to adjust the financial statements or issue a(n) __________ opinion.
qualified or adverse
Which of the following procedures is not a procedure that is completed near the end of the engagement? A. Obtain the letter of representations. B. Review to identify subsequent events. C. Review cash transactions. D. Obtain the lawyer's letter.
C. Review cash transactions.
Effective internal control over the payroll function would include which of the following? A. Payroll department employees should be supervised by the management of the personnel department. B. Payroll department employees should be responsible for maintaining employee personnel records. C. Total time spent on jobs should be compared with total time indicated on time clock punch cards. D. Total time recorded on time clock cards should be reconciled to job reports by employees responsible for those specific jobs.
C. Total time spent on jobs should be compared with total time indicated on time clock punch cards.
A bank loses money that it loaned to an issuer in reliance upon financial statements filed with the SEC.
Common law
Accounting related consulting services resulted in a system that misstated income of a nonpublic company.
Common law
Compiled financial statements of a nonpublic company are discovered to include material misstatements.
Common law
The client files a lawsuit against the CPAs for negligence in the performance of tax services.
Common law
Unwritten law that has developed through court decisions; it represents judicial interpretation of a society's concept of fairness.
Common law
Which of the following representations does an auditor make explicitly and which implicitly when issuing a standard unqualified opinion on a public company's financial statements? Conformity with PCAOB Standards: Explicitly or Implicitly Going Concern Status: Explicitly or Implicitly
Conformity with PCAOB Standards: Explicitly Going Concern Status: Implicitly
Performing duties with such recklessness that persons believing the duties to have been completed carefully are being misled. The person performing the duties does not have knowledge of misrepresentations within the financial statements.
Constructive fraud
A possible liability, stemming from past events, that will be resolved as to existence and amount by some future event.
Contingent liability
True or False: When the auditors of a nonpublic company are unable to comply with generally accepted auditing standards, they should issue an opinion that is unmodified, but include an additional emphasis-of-matter paragraph in the report.
False
Misrepresentation by a person of a material fact, known by that person to be untrue or made with reckless indifference as to whether the fact is true, with intent to deceive and with the result that another party is injured.
Fraud
An element of the business environment that involves some risk of a future loss. Examples include the risk of accident, strike, price fluctuations, or natural catastrophe. General risk contingencies should not be disclosed in financial statements.
General risk contingency
The ______________ department of the company should authorize changes in employee pay rates.
Human Resources ("HR" or personnel)
The primary purpose of the __________ is to have the client's principal officers acknowledge that they are primarily responsible for the fairness of the financial statements.
representation letter
A __________ of financial statements involves the performance of limited investigative procedures that provide a basis for the expression of limited assurance that there are no material departures from generally accepted accounting principles.
review
An event occurring after the date of the balance sheet, but prior to completion of the audit, is called a __________.
subsequent event
When CPAs are associated with __________, a possibility exists that the client may misinterpret the extent of the CPAs' services and believe that the accountants are acting as auditors.
unaudited financial statements
True or False: The Miscellaneous Revenue account should only be analyzed if it is material in amount.
False
True or False: When evaluating the results of audit tests, materiality depends solely upon the dollar amount of the item.
False
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. The notes to the financial statements do not adequately disclose the substantial doubt situation, and the auditor believes the omission fundamentally affects the users' understanding of the financial statements.
Adverse
A material misstatement is considered pervasive
Adverse Opinion
The client has elected to not follow GAAP
Adverse Opinion
Assume that a CPA firm was negligent but not grossly negligent in the performance of an engagement. Which of the following plaintiffs probably would not recover losses proximately caused by the auditors' negligence? A. A loss sustained by initial purchasers of stock in a suit brought under the Securities Act of 1933. B. A loss sustained by a lender not in privity of contract in a suit brought in a state court which adheres to the Ultramares v. Touche precedent. C. A loss sustained by a bank named as a third-party beneficiary in the engagement letter in a suit brought under common law. D. A loss sustained by a client in a suit brought under common law.
B. A loss sustained by a lender not in privity of contract in a suit brought in a state court which adheres to the Ultramares v. Touche precedent.
An audit report on a public company is least likely to include a paragraph titled: A. Basis for Opinion. B. Opinion on the Financial Statements. C. Auditor responsibility D. Critical Audit Matters.
C. Auditor responsibility
True or False: Negligence is defined as failure to use reasonable care in the performance of services.
True
For clients that distribute checks or cash payments and have significant payroll control weakness, which of the following audit procedures is aimed at determining whether every name on the company payroll is a bona fide employee actually on the job? A. Analytical comparisons of budgeted to actual payroll expense. B. A surprised observation of a paycheck distribution, while establishing the identity of each employee receiving payment. C. Comparison of payee names on canceled payroll checks with the payroll register. D. A test of payroll extensions.
B. A surprised observation of a paycheck distribution, while establishing the identity of each employee receiving payment.
In which type of court case is proving "due diligence" essential to the auditors' defense? A. Court cases brought by third parties under common law. B. Court cases brought under the Securities Act of 1933. C. Court cases brought under the Securities Exchange Act of 1934. D. Court cases brought by clients under common law.
B. Court cases brought under the Securities Act of 1933.
When an auditor does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should: A. Issue an adverse opinion. B. Issue an unmodified opinion with no reference to this omission. C. Issue a qualified opinion or a disclaimer, depending on the materiality of the receivables. D. Issue an unmodified opinion, but disclose elsewhere in the report this departure from a customary procedure.
B. Issue an unmodified opinion with no reference to this omission.
Which of the following must be proven by the plaintiff in a case against a CPA under the Section 11 liability provisions of the Securities Act of 1933? A. The unqualified opinion contained in the registration statement was relied upon by the party suing the CPA. B. Material misstatements were contained in the financial statements. C. The CPA was negligent. D. The CPA knew of the misstatement.
B. Material misstatements were contained in the financial statements.
A CPA issued an unqualified opinion on the financial statements of a company that sold common stock in a public offering subject to the Securities Act of 1933. Based on a misstatement in the financial statements, the CPA is being sued by an investor who purchased shares of this public offering. Which of the following represents a viable defense? A. The investor has not proven CPA negligence. B. The audit work was adequate to support the CPA's opinion. C. The CPA detected the misstatement after the audit report date. D. The investor did not rely upon the financial statement.
B. The audit work was adequate to support the CPA's opinion.
Revenue and expense accounts are audited in conjunction with related __________ accounts.
Balance Sheet
The __________ case, a landmark case of liability under the Securities Act of 1933, involved criticism of the auditors' review for subsequent events.
BarChris
Failure of one or both parties to a contract to perform in accordance with the contract's provisions.
Breach of contract
A contractual obligation to carry out a transaction at specified terms in the future. Material commitments should be disclosed in the financial statements.
Commitment
The Second Restatement of the Law of Torts provides for auditor liability to a limited class of foreseen third parties for: A. Only fraud. B. Only criminal acts. C. Only gross negligence. D. Either ordinary or gross negligence.
D. Either ordinary or gross negligence.
A CPA's duty of due care to a client most likely will be breached when a CPA: A. Gives a client incorrect advice based on an honest error of judgment. B. Gives a client an oral report instead of a written report. C. Fails to give tax advice that saves the client money. D. Fails to follow generally accepted auditing standards.
D. Fails to follow generally accepted auditing standards
An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements (including projecting misstatements where appropriate) existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current year or previous years.
Iron curtain approach
Written law created by state or federal legislative bodies.
Statutory law
A CPA is criminally prosecuted for willingly allowing misstatements in a client's financial statements contained in a registration statement.
The Securities Act of 1933
An initial purchaser of bonds of an issuer sustains a loss.
The Securities Act of 1933
Form S-1 includes material misstatements of the audited financial statements.
The Securities Act of 1933
The initial purchaser of common stock of an issuer sustains a loss.
The Securities Act of 1933
A quarterly statement (10-Q) of a client is materially misstated.
The Securities Exchange Act of 1934
A stockholder sustains a loss when he purchases 100 shares of stock in a public company (issuer) from another stockholder in reliance upon audited financial statements included in Form 10-K.
The Securities Exchange Act of 1934
True or False: Audit reports should be dated as the date on which sufficient appropriate audit evidence has been collected.
True
Gross negligence is also referred to as __________.
constructive fraud
A document including audited financial statements that must be filed with the SEC by any company intending to sell its securities to the public through the mails or interstate commerce is called a __________.
registration statement
A company valued its inventory at current replacement cost. Although the auditor believes that the inventory costs do approximate replacement costs, these costs do not approximate any GAAP inventory valuation method.
Qualified or adverse.
A client uses the specific identification method of accounting for valuable items in inventory, and LIFO for less valuable items. The auditor concurs that this is a reasonable practice.
Unmodified—standard.
Required: For each of the subsequent events, indicate whether they should result in: 1. Adjustment—an adjusting entry as of 20X3. 2. Consider Disclosure—consideration of note disclosure as of 20X3. January 7, 20X4: The mineral content of a shipment of ore en route to Hollis Mfg. Corporation on December 31, 20X3, was determined to be 72 percent. The shipment was recorded at year-end at an estimated content of 50 percent by a debit to Raw Materials Inventory and a credit to Accounts Payable in the amount of $82,400. The final liability to the vendor is based on the actual mineral content of the shipment.
1. Adjustment—an adjusting entry as of 20X3.
Required: For each of the subsequent events, indicate whether they should result in: 1. Adjustment—an adjusting entry as of 20X3. 2. Consider Disclosure—consideration of note disclosure as of 20X3. On January 18, 20X4, a major customer filed for bankruptcy. The customer's financial condition had been degenerating over recent years.
1. Adjustment—an adjusting entry as of 20X3.
The __________ case was a landmark case regarding the accountant's liability for unaudited financial statements.
1136 Tenants' Corporation
Required: For each of the subsequent events, indicate whether they should result in: 1. Adjustment—an adjusting entry as of 20X3. 2. Consider Disclosure—consideration of note disclosure as of 20X3. January 15, 20X4: Following a series of personal disagreements between Ray Hollis, the president, and his brother-in-law, the treasurer, the latter resigned, effective immediately, under an agreement whereby the corporation would purchase his 10 percent stock ownership at book value as of December 31, 20X3. Payment is to be made in two equal amounts in cash on April 1 and October 1, 20X4. In December, the treasurer had obtained a divorce from his wife, who is Ray Hollis's sister.
2. Consider Disclosure—consideration of note disclosure as of 20X3.
Required: For each of the subsequent events, indicate whether they should result in: 1. Adjustment—an adjusting entry as of 20X3. 2. Consider Disclosure—consideration of note disclosure as of 20X3. January 16, 20X4: As a result of reduced sales, production was curtailed in mid-January and some workers were laid off.
2. Consider Disclosure—consideration of note disclosure as of 20X3.
Required: For each of the subsequent events, indicate whether they should result in: 1. Adjustment—an adjusting entry as of 20X3. 2. Consider Disclosure—consideration of note disclosure as of 20X3. On January 28, 20X4, a famous analyst who followed the industry provided a negative report on his expectations concerning the short and intermediate term for the industry.
2. Consider Disclosure—consideration of note disclosure as of 20X3.
Unwritten law that has developed through court decisions is referred to as __________.
common law
An example of an internal control weakness is to assign the payroll department the responsibility for: A. Authorizing increases in pay. B. Preparing the payroll expense distribution. C. Preparing journal entries for payroll expense. D. Preparing the payroll checks.
A. Authorizing increases in pay.
For a continuing audit client, when a complete set of financial statements is presented on a comparative basis for two years, the auditors' opinion would refer to: A. Each of the years in the two-year period. B. Each of the two years plus the preceding year. C. Either one or both years at the option of the auditors. D. Only the current year under audit.
A. Each of the years in the two-year period.
CPA Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the group auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume full responsibility for Firm B's work. Which of the following statements is correct? A. In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements. B. Such assumption of responsibility violates the profession's standards. C. In such circumstances, when appropriate requirements have been met, Firm A should issue an unmodified opinion on the financial statements but should make appropriate reference to Firm B in the audit report. D. CPA firm A should normally qualify its audit report on the basis of the scope limitation involved when another CPA firm is involved.
A. In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements.
When an auditor of financial statements has substantial doubt about an entity's ability to continue as a going concern, the auditor most likely would express a qualified or adverse opinion if: A. Information about the entity's ability to continue as a going concern is not disclosed in the financial statements. B. Negative trends and recurring operating losses appear to be irreversible. C. Management has no plans to reduce or delay future expenditures. D. The effects of the adverse financial conditions are likely to be negative.
A. Information about the entity's ability to continue as a going concern is not disclosed in the financial statements.
Under Section 10 of the 1934 Securities Exchange Act auditors are liable to security purchasers for: A. Intent to deceive or defraud. B. Lack of due diligence. C. Auditors have no liability to security purchasers under this act. D. Ordinary negligence.
A. Intent to deceive or defraud.
The purpose of segregating the duties of distributing payroll checks and hiring personnel is to: A. Separate the authorization of transactions from the custody of related assets. B. Separate the custody of assets from the accounting for those assets. C. Establish clear lines of authority and responsibility. D. Separate duties within the accounting function.
A. Separate the authorization of transactions from the custody of related assets.
If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows: A. The auditors should issue a qualified report for the departure from generally accepted accounting principles. B. The auditors should disclaim an opinion on the overall financial statements. C. The auditors may still issue an unmodified opinion. D. The auditors should issue a qualified report indicating a scope limitation in that no statement of cash flows is presented.
A. The auditors should issue a qualified report for the departure from generally accepted accounting principles.
Which of the following would most likely be an appropriate addressee for an audit report? A. The shareholders of the corporation whose financial statements were examined. B. A third party who requested that a copy of the audit report be sent to her. C. The president of the corporation whose financial statements were examined. D. The chief financial officer.
A. The shareholders of the corporation whose financial statements were examined.
The Public Company Accounting Oversight Board may conduct investigations and disciplinary proceedings of: Registered Public Accounting FirmsRegistered and/or Public Accounting Firm Employees
Both
Which of the following is an analytical procedure that should be applied to the income statement? A. Select sales and expense items and trace amounts to related supporting documents. B. Ascertain that the net income amount in the statement of cash flows agrees with the net income amount in the income statement. C. Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences. D. Obtain from the proper client representatives, the beginning and ending inventory amounts that were used to determine costs of sales.
C. Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.
An auditor should obtain written representations from the company's attorney concerning litigation claims and assessments, which may be limited to matters that are considered either individually or collectively material. An understanding on the limits of materiality for this purpose has been reached by: A. The auditor and the client's lawyer. B. The auditor independently of management. C. Management and the auditor. D. Management, the client's lawyer, and the auditor.
C. Management and the auditor.
It would be appropriate for the payroll accounting department to be responsible for which of the following functions? A. Approval of employee time records. B. Maintenance of records of employment, discharges, and pay increases. C. Preparation of periodic governmental reports as to employees' earnings and withholding taxes. D. Distribution of paychecks to employees.
C. Preparation of periodic governmental reports as to employees' earnings and withholding taxes.
The date the auditor grants the client permission to use the audit report in connection with the financial statements is the: A. Last day of significant field work. B. Representation date. C. Report release date. D. Report cutoff date.
C. Report release date.
Jones, CPA, is in court defending himself against a lawsuit filed under the 1933 Securities Act. The charges have been filed by purchasers of securities covered under that act. If the purchasers prove their required elements, in general, Jones will have to prove that: A. He is not guilty of gross negligence. B. The plaintiffs did not show him to be negligent. C. He performed the audit with good faith. D. He performed the audit with due diligence.
D. He performed the audit with due diligence.
Which of the following forms of organization is most likely to protect the personal assets of any partner, or shareholder who has not been involved on an engagement resulting in litigation? A. Professional corporation. B. Partnership. C. Subchapter M Incorporation. D. Limited liability partnership.
D. Limited liability partnership.
Which of the following auditing procedures is ordinarily performed last? A. Confirming accounts payable. B. Testing of the purchasing function. C. Reading of the minutes of the directors' meetings. D. Obtaining a management representation letter.
D. Obtaining a management representation letter.
The Private Securities Litigation Reform Act of 1995 imposes proportionate liability on the CPA who: A. Knowingly or unknowingly violates the 1933 Securities Act. B. Unknowingly violates the 1933 Securities Act. C. Knowingly or unknowingly violates the 1934 Securities Exchange Act. D. Unknowingly violates the 1934 Securities Exchange Act.
D. Unknowingly violates the 1934 Securities Exchange Act.
Which of the following is not a procedure normally performed while completing the audit of a public company? A. Perform an overall review using analytical procedures. B. Obtain a representations letter. C. Obtain a lawyer's letter. D. Update internal control questionnaire.
D. Update internal control questionnaire.
The term "except for" in an audit report is: A. No longer considered appropriate. B. Used in an adverse opinion. C. Used for an unmodified opinion when an emphasis-of-matter paragraph is added. D. Used in a qualified opinion.
D. Used in a qualified opinion.
Auditors determine that the possible effects on the financial statements of the inability to obtain sufficient evidence (i.e. a scope limitation) could be both material and pervasive
Disclaimer of Opinion
Misstatements about which there is no doubt as to amount.
Factual misstatements
True or False: A public company's financial statements should be prepared following standards of the Public Company Accounting Oversight Board.
False
True or False: Auditors have a responsibility to report on all FASB-required supplementary information for publicly-traded companies.
False
True or False: Dual-dating of an audit report extends the auditors' liability for disclosure through the later date for all areas of the financial statements.
False
A possible loss, stemming from past events, that will be resolved as to existence and amount by some future event.
Loss contingency
In addition to proving a loss, which of the following must be proven by a third party suing a CPA under Section 11 of the 1933 Securities Act? Misleading Financial Statements and/or Reliance on financial statements
Misleading Financial Statements
Violation of a legal duty to exercise a degree of care that an ordinarily prudent person would exercise under similar circumstances.
Negligence
Misstatements identified by the auditors during the course of the audit that are due to extrapolation of sample results to the entire population.
Projected misstatements
A method of allocating damages to each group that is liable according to that group's pro-rata share of any damages recovered by the plaintiff. For example, if the plaintiff was awarded a total of $500,000 and the CPAs were found to bear 30 percent of the responsibility for the damages, the CPAs would be assessed $150,000.
Proportionate Liability
Damage to another is directly attributable to a wrongdoer's act. This issue may be raised as a defense in litigation—that is, the defense may argue that some other factor caused the loss.
Proximate Cause
A client changed its depreciation method for production equipment from the straight-line to a units-of-production method based on hours of utilization. The auditor does not concur with the change.
Qualified or adverse.
A client's financial statements follow GAAP except that they do not include a note on a significant related party transaction.
Qualified or adverse.
A company has not followed generally accepted accounting principles in the recording of its leases.
Qualified or adverse.
In auditing the long-term investments account of a new client, an auditor finds that a large contingent liability exists that is material to the consolidated company. It is probable that this contingent liability will be resolved with a material loss in the future, and this amount is reasonably estimable as $2,000,000. Although no adjusting entry has been made, the client has provided a note to the financial statements that describes the matter in detail and includes the $2,000,000 estimate in that note.
Qualified or adverse.
An auditor discovered that a client made illegal political payoffs to a candidate for president of the United States. The auditor was unable to determine the amounts associated with the payoffs because of the client's inadequate record-retention policies. The client has added a note to the financial statements to describe the illegal payments and has stated that the amounts of the payments are not determinable.
Qualified or disclaimer.
An auditor was hired after year-end and was unable to observe the counting of the year-end inventory. She is unable to apply other procedures to determine whether ending inventory and related information are properly stated.
Qualified or disclaimer.
A client changed the depreciable life of certain assets from 10 years to 12 years. The auditor does not concur with the change. Confined to fixed assets and accumulated depreciation, the misstatements involved are not considered pervasive.
Qualified.
An auditor discovered that a client made illegal political payoffs to a candidate for president of the United States. The auditor was unable to determine the amounts associated with the payoffs because of the client's inadequate record-retention policies. Although there is no likelihood that the financial statements are pervasively misstated, they may be materially misstated. The client refuses to disclose the payoffs in a note to the financial statements.
Qualified.
An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements (including projecting misstatements where appropriate) only during the current year.
Rollover approach
Intent to deceive, manipulate, or defraud. This concept is used in the 1934 Securities Exchange Act to establish auditor liability.
Scienter
True or False: Future purchase commitments should be disclosed in the notes to the financial statements.
True
True or False: If financial statements contain a pervasively material departure from generally accepted accounting principles, the auditors usually should issue an adverse opinion.
True
A client changed its depreciation method for production equipment from the straight-line method to the units-of-production method based on hours of utilization. The auditor concurs with the change.
Unmodified with an emphasis-of-matter paragraph.
A client's financial statements follow GAAP, but the auditor wishes to emphasize in his audit report a significant related party transaction that is adequately described in the notes to the financial statements.
Unmodified with an emphasis-of-matter paragraph.
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. The notes to the financial statements adequately disclose the situation. The auditor has decided not to issue a disclaimer of opinion.
Unmodified with an emphasis-of-matter paragraph.
A client changed the depreciable life of certain assets from 10 years to 12 years. The auditor concurs with the change.
Unmodified—standard.
A client changed the method it uses to calculate postemployment benefits from one acceptable method to another. The effect of the change is immaterial this year but is expected to be material in the future.
Unmodified—standard.
A client changed the salvage value of certain assets from 5 percent to 10 percent of original cost. The auditor concurs with the change.
Unmodified—standard.
A client is issuing two years of comparative financial statements. The first year was audited by another auditor who is being asked to reissue her audit report. (Reply as to the successor auditors' report.)
Unmodified—standard.
An auditor reporting on group financial statements decides to take responsibility for the work of a component auditor who audited a 70 percent owned subsidiary and issued an unmodified opinion. The total assets and revenues of the subsidiary are 5 percent and 8 percent, respectively, of the total assets and revenues of the entity being audited.
Unmodified—standard.
An auditor was hired after year-end and was unable to observe the counting of the year-end inventory. However, she was able to apply other procedures and determined that ending inventory and related information are properly stated.
Unmodified—standard.
In auditing the long-term investments account of a new client, an auditor finds that a large contingent liability exists that is material to the consolidated company. It is probable that this contingent liability will be resolved with a material loss in the future, but the amount is not estimable. Although no adjusting entry has been made, the client has provided a note to the financial statements that describes the matter in detail.
Unmodified—standard.
Auditors have doubt about a company's ability to continue as a going concern
Unqualified Opinion with and Emphasis-of-Matter Paragraph
The auditors should obtain a letter from the client's attorneys describing __________.
claims, litigations, and assessments