Management believes and the auditor is satisfied, that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss, but fully discloses the situation in the notes to the financial statements. If the auditor wishes to call attention to the matter and management does not make an accrual in the financial statements, the auditor should issue a(an)
A) Qualified report due to a scope limitation.
B) Qualified report due to a departure from GAAP.
C) Unqualified/unmodified report with an explanatory/emphasis-of-matter paragraph.
D) Unqualified/unmodified report in a standard auditor's report.

Question

Quizplus · Accepted Answer

The situation described is a material uncertainty that requires disclosure in the financial statements. However, since management cannot estimate the potential loss and does not make an accrual, the auditor may want to draw further attention to the matter by including an explanatory or emphasis-of-matter paragraph in an unqualified/unmodified report. This indicates that the financial statements are fairly presented, but there is additional information that users should be aware of. A qualified report is not required since there is no departure from GAAP, and a scope limitation is not applicable in this scenario.

Management Believes and the Auditor Is Satisfied, That a Material