Assume that items 1–8 are situations that Blas, CPA, has encountered during his audit of GELAY, 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 response from List A and one (1) from List B. Select 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 isThe auditor previously expressed an unmodified opinion on the prior year’s financialOnly single-year (not comparative) statements are presented for the currentThe conditions for an unmodified opinion exist unless contradicted by theThe conditions stated in the items to be answered are material, unless otherwiseEach item to be answered is independent of theNo report modifications are to be made except in response to the factualThe 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 toList A Types of opinionsList BReport modificationsA. Qualified opinion or adverse opinionH. Basis for Modification paragraphB. Qualified opinion or disclaimer of opinionI. Emphasis of Matter paragraphC. Either an adverse opinion or a disclaimer of opinionJ. Other Matter paragraphD. Qualified opinionK. No additional paragraphE. Unmodified opinionL. Describe the circumstances within the opinion paragraphF. An adverse opinion G. A disclaimer of opinion Types of Opinions(A–G)Additional Paragraph(H–L)1. Blas hired an actuary to assist in corroborating GELAY’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 GELAY’s calculations and support the financial statements. 2. GELAY holds a note receivable consisting of principal and accrued interest receivable in 20X4. The note’s maker recently filed a voluntary bankruptcy petition, but GELAY failed to reduce the recorded value of the note to its net realizable value, which is approximately 20% of the recorded amount. 3. Blas was engaged to audit a client’s financial statements after the annual physical inventory count. The accounting records were not sufficiently reliable to enable him to become satisfied as to the year-end inventory balances. 4. Blas found an immaterial adjustment relating to inventory. GELAY has refused to adjust the financial statements to reflect this immaterial item. 5. GELAY’s financial statements do not disclose certain long-term lease obligations. Blas determined that the accounting standards require the omitted disclosures. 6. Blas decided not to take responsibility for the work of another CPA who audited a wholly-owned subsidiary of GELAY. The total assets and revenues of the subsidiary represent 27% and 28%, respectively, of the related consolidated totals. 7. GELAY changed its method of accounting for the cost of inventories from first-in, first-out (FIFO) to last-in, first-out (LIFO). Blas 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, Blas has substantial doubt about GELAY’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, Blas has ruled out the use of a disclaimer of opinion.

Question

Assume that items 1–8 are situations that Blas, CPA, has encountered during his audit of GELAY, 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 response from List A and one (1) from List B. Select 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 isThe auditor previously expressed an unmodified opinion on the prior year’s financialOnly single-year (not comparative) statements are presented for the currentThe conditions for an unmodified opinion exist unless contradicted by theThe conditions stated in the items to be answered are material, unless otherwiseEach item to be answered is independent of theNo report modifications are to be made except in response to the factualThe 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 toList A Types of opinionsList BReport modificationsA.     Qualified opinion or adverse opinionH. Basis for Modification paragraphB.     Qualified opinion or disclaimer of opinionI.  Emphasis of Matter paragraphC.     Either an adverse opinion or a disclaimer of opinionJ.  Other Matter paragraphD.     Qualified opinionK.  No additional paragraphE.     Unmodified opinionL. Describe the circumstances within the opinion paragraphF.     An adverse opinion G.     A disclaimer of opinion   Types of Opinions(A–G)Additional Paragraph(H–L)1.     Blas hired an actuary to assist in corroborating GELAY’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 GELAY’s calculations and support the financial statements.  2.     GELAY holds a note receivable consisting of principal and accrued interest receivable in 20X4. The note’s maker recently filed a voluntary bankruptcy petition, but GELAY failed to reduce the recorded value of the note to its net realizable value, which is approximately 20% of the recorded amount.  3.     Blas was engaged to audit a client’s financial statements after the annual physical inventory count. The accounting records were not sufficiently reliable to enable him to become satisfied as to the year-end inventory balances.  4.     Blas found an immaterial adjustment relating to inventory. GELAY has refused to adjust the financial statements to reflect this immaterial item.  5.     GELAY’s financial statements do not disclose certain long-term lease obligations. Blas determined that the accounting standards require the omitted disclosures.  6.     Blas decided not to take responsibility for the work of another CPA who audited a wholly-owned subsidiary of GELAY. The total assets and revenues of the subsidiary represent 27% and 28%, respectively, of the related consolidated totals.  7.     GELAY changed its method of accounting for the cost of inventories from first-in, first-out (FIFO) to last-in, first-out (LIFO). Blas 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, Blas has substantial doubt about GELAY’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, Blas has ruled out the use of a disclaimer of opinion.

Accepted Answer

Answer :
1.When an auditor recruits an expert to help with authenticating a customer gauge (here…

List A Types of opinions	List B 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 opinion	J. Other Matter paragraph
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 Opinions (A–G)	Additional Paragraph (H–L)
1. Blas hired an actuary to assist in corroborating GELAY’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 GELAY’s calculations and support the financial statements.
2. GELAY holds a note receivable consisting of principal and accrued interest receivable in 20X4. The note’s maker recently filed a voluntary bankruptcy petition, but GELAY failed to reduce the recorded value of the note to its net realizable value, which is approximately 20% of the recorded amount.
3. Blas was engaged to audit a client’s financial statements after the annual physical inventory count. The accounting records were not sufficiently reliable to enable him to become satisfied as to the year-end inventory balances.
4. Blas found an immaterial adjustment relating to inventory. GELAY has refused to adjust the financial statements to reflect this immaterial item.
5. GELAY’s financial statements do not disclose certain long-term lease obligations. Blas determined that the accounting standards require the omitted disclosures.
6. Blas decided not to take responsibility for the work of another CPA who audited a wholly-owned subsidiary of GELAY. The total assets and revenues of the subsidiary represent 27% and 28%, respectively, of the related consolidated totals.
7. GELAY changed its method of accounting for the cost of inventories from first-in, first-out (FIFO) to last-in, first-out (LIFO). Blas 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, Blas has substantial doubt about GELAY’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, Blas has ruled out the use of a disclaimer of opinion.