Following are two independent situations.
A. Grinner and Greeter, CPAs, were engaged to perform an audit of the financial statements of Happy, Inc. Happy's management would not allow Grinner and Greeter to confirm any of the accounts receivable. All other auditing procedures were performed as considered necessary by Grinner and Greeter and no issues were encountered. However, Grinner and Greeter were unable to satisfy themselves with regard to the balance in accounts receivable.
A. The company has imposed a scope limitation on Grinner and Greeter. Although it is possible to issue a qualified opinion for a less material scope limitation, disclaimers of opinion are more appropriately issued for client-imposed scope limitations than for circumstance-imposed scope limitations. For the disclaimer of opinion, (1) the introductory paragraph would be modified to state that auditors were engaged to audit the financial statements and delete the sentence referring to the auditors' responsibility for the financial statements, (2) the scope paragraph would be omitted, (3) an additional paragraph would be added to describe the scope limitation, and, (4) the opinion paragraph would be modified to express a disclaimer of opinion.
B. Because Johnson Manufacturing has not properly recorded a loss and a liability, the financial statements are not in conformity with generally accepted accounting principles. Therefore, depending on the overall materiality and pervasiveness of the misstatement, Tick and Tie should issue either a qualified or adverse opinion. In each case, a third paragraph would be added to the report to explain the departure from GAAP and the opinion paragraph would be modified to express either a qualified opinion or an adverse opinion.
B. Tick and Tie, CPAs, were performing their annual audit of Johnson Manufacturing Company. Johnson is currently being sued for $2,000,000 related to an alleged defective product that they sold to a customer. Johnson's legal counsel has told Tick and Tie that it is probable that Johnson will lose the suit and have to pay the entire $2,000,000. Johnson's management has included information in the footnotes about the lawsuit. However, they have not recorded any loss or liability in the income statement or balance sheet.
Required:
For each of the two independent situations, state what type of opinion should be issued on the company's financial statements. Briefly explain your rationale. Finally, state which paragraphs, if any, of the standard report would be modified.

Question

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The Answer of Following are two independent situations.
A. Grinner and Greeter, CPAs, were engaged to perform an audit of the financial statements of Happy, Inc. Happy's management would not allow Grinner and Greeter to confirm any of the accounts receivable. All other auditing procedures were performed as considered necessary by Grinner and Greeter and no issues were encountered. However, Grinner and Greeter were unable to satisfy themselves with regard to the balance in accounts receivable.
A. The company has imposed a scope limitation on Grinner and Greeter. Although it is possible to issue a qualified opinion for a less material scope limitation, disclaimers of opinion are more appropriately issued for client-imposed scope limitations than for circumstance-imposed scope limitations. For the disclaimer of opinion, (1) the introductory paragraph would be modified to state that auditors were engaged to audit the financial statements and delete the sentence referring to the auditors' responsibility for the financial statements, (2) the scope paragraph would be omitted, (3) an additional paragraph would be added to describe the scope limitation, and, (4) the opinion paragraph would be modified to express a disclaimer of opinion.
B. Because Johnson Manufacturing has not properly recorded a loss and a liability, the financial statements are not in conformity with generally accepted accounting principles. Therefore, depending on the overall materiality and pervasiveness of the misstatement, Tick and Tie should issue either a qualified or adverse opinion. In each case, a third paragraph would be added to the report to explain the departure from GAAP and the opinion paragraph would be modified to express either a qualified opinion or an adverse opinion.
B. Tick and Tie, CPAs, were performing their annual audit of Johnson Manufacturing Company. Johnson is currently being sued for $2,000,000 related to an alleged defective product that they sold to a customer. Johnson's legal counsel has told Tick and Tie that it is probable that Johnson will lose the suit and have to pay the entire $2,000,000. Johnson's management has included information in the footnotes about the lawsuit. However, they have not recorded any loss or liability in the income statement or balance sheet.
Required:
For each of the two independent situations, state what type of opinion should be issued on the company's financial statements. Briefly explain your rationale. Finally, state which paragraphs, if any, of the standard report would be modified.

Following Are Two Independent Situations