Following are two independent situations.

A. Grinner and Greeter, CPAs, were engaged to perform an audit ofthe financial statements of Happy, Inc. Happy's management wouldnot allow Grinner and Greeter to confirm any of the accountsreceivable. All other auditing procedures were performed asconsidered necessary by Grinner and Greeter and no issues wereencountered. However, Grinner and Greeter were unable to satisfythemselves with regard to the balance in accounts receivable.

B. Tick and Tie, CPAs, were performing their annual audit ofJohnson Manufacturing Company. Johnson is currently being sued for$2,000,000 related to an alleged defective product that they soldto a customer. Johnson's legal counsel has told Tick and Tie thatit is probable that Johnson will lose the suit and have to pay theentire $2,000,000. Johnson's management has included information inthe footnotes about the lawsuit. However, they have not recordedany loss or liability in the income statement or balancesheet.

Required:

For each of the two independent situations, state what type ofopinion should be issued on the company's financial statements.Briefly explain your rationale. Finally, state which paragraphs, ifany, of the standard report would be modified.

Note : I have the answer but I want to paraphraseit.

âTha answer is :

A. The company has imposed a scope limitationon Grinner and Greeter. Although it is possible to issue aqualified opinion for a less material scope limitation, disclaimersof opinion are more appropriately issued for client-imposed scopelimitations than for circumstance-imposed scope limitations. Forthe disclaimer of opinion, (1) the introductory paragraph would bemodified to state that auditors were engaged to audit thefinancial statements and delete the sentence referring to theauditors' responsibility for the financial statements, (2) thescope paragraph would be omitted, (3) an additional paragraph wouldbe added to describe the scope limitation, and, (4) the opinionparagraph would be modified to express a disclaimer ofopinion.

B. Because Johnson Manufacturing has not properlyrecorded a loss and a liability, the financial statements are notin conformity with generally accepted accounting principles.Therefore, depending on the overall materiality and pervasivenessof the misstatement, Tick and Tie should issue either a qualifiedor adverse opinion. In each case, a third paragraph would be addedto the report to explain the departure from GAAP and the opinionparagraph would be modified to express either a qualified opinionor an adverse opinion.

Question

Following are two independent situations.

A. Grinner and Greeter, CPAs, were engaged to perform an audit ofthe financial statements of Happy, Inc. Happy's management wouldnot allow Grinner and Greeter to confirm any of the accountsreceivable. All other auditing procedures were performed asconsidered necessary by Grinner and Greeter and no issues wereencountered. However, Grinner and Greeter were unable to satisfythemselves with regard to the balance in accounts receivable.

B. Tick and Tie, CPAs, were performing their annual audit ofJohnson Manufacturing Company. Johnson is currently being sued for$2,000,000 related to an alleged defective product that they soldto a customer. Johnson's legal counsel has told Tick and Tie thatit is probable that Johnson will lose the suit and have to pay theentire $2,000,000. Johnson's management has included information inthe footnotes about the lawsuit. However, they have not recordedany loss or liability in the income statement or balancesheet.

Required:

For each of the two independent situations, state what type ofopinion should be issued on the company's financial statements.Briefly explain your rationale. Finally, state which paragraphs, ifany, of the standard report would be modified.

Note : I have the answer but I want to paraphraseit.

âTha answer is :

A. The company has imposed a scope limitationon Grinner and Greeter. Although it is possible to issue aqualified opinion for a less material scope limitation, disclaimersof opinion are more appropriately issued for client-imposed scopelimitations than for circumstance-imposed scope limitations. Forthe disclaimer of opinion, (1) the introductory paragraph would bemodified to state that auditors were engaged to audit thefinancial statements and delete the sentence referring to theauditors' responsibility for the financial statements, (2) thescope paragraph would be omitted, (3) an additional paragraph wouldbe added to describe the scope limitation, and, (4) the opinionparagraph would be modified to express a disclaimer ofopinion.

B. Because Johnson Manufacturing has not properlyrecorded a loss and a liability, the financial statements are notin conformity with generally accepted accounting principles.Therefore, depending on the overall materiality and pervasivenessof the misstatement, Tick and Tie should issue either a qualifiedor adverse opinion. In each case, a third paragraph would be addedto the report to explain the departure from GAAP and the opinionparagraph would be modified to express either a qualified opinionor an adverse opinion.

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