Subsequent to the close of Spacely Sprockets fiscal year ending October 31, 2019, a major debtor has declared bankruptcy due to a series of events. The receivable is significantly material in relation to the financial statements, and recovery is doubtful. The debtor had confirmed the full amount due to Spacely Sprocket at the balance sheet date. Because the account was confirmed at the balance sheet date, Spacely refuses to disclose any information in relation to this subsequent event. The CPA believes that all other accounts were stated fairly at the balance sheet date. In addition, Spacely changed their method of inventory valuation from FIFO to LIFO. This change was disclosed in Note X to the financial statements. Accordingly, what type of opinion should be expressed?
A) unqualified with an explanatory paragraph
B) qualified due to a GAAP departure
C) qualified due to a scope limitation
D) a combination of B and C

Question

Quizplus · Accepted Answer

The refusal to disclose information about a significant subsequent event that affects the financial statements is a departure from Generally Accepted Accounting Principles (GAAP), which requires disclosure of events that occur after the balance sheet date that have a material effect on the financial statements. The change in inventory valuation method from FIFO to LIFO, when properly disclosed, does not by itself necessitate a modified opinion, as long as it is accounted for and disclosed according to GAAP.

Subsequent to the Close of Spacely Sprockets Fiscal Year Ending