Management determined it was probable that a pending litigation claim would result in a material loss. The loss was disclosed in the footnotes to the financial statements but was not accrued in the income statement. If the auditors believe an accrual should be made, what type of report should be issued?
A)Standard (unmodified)report.
B)Unmodified opinion with an emphasis-of-matter paragraph.
C)Qualified opinion based on a circumstance-imposed scope limitation.
D)Qualified or adverse opinion based on a departure from GAAP.

Question

Quizplus · Accepted Answer

If the auditors believe an accrual should be made but it has not been made by management, and if they determine that such accrual is required by generally accepted accounting principles (GAAP), the auditors should issue a qualified or adverse opinion based on a departure from GAAP. Accrual of the loss would be considered an adjusting event requiring proper recognition in the financial statements.

Management Determined It Was Probable That a Pending Litigation Claim