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 report with an explanatory/emphasis-of-matter paragraph.
D) a standard unmodified auditor's report.

Question

Quizplus · Accepted Answer

If management discloses the situation in the notes to the financial statements, but is unable to make a reasonable estimate of the potential loss, the auditor should issue an unqualified report with an explanatory or emphasis-of-matter paragraph drawing attention to the disclosure in the notes. If the auditor believes that the lack of accrual is a departure from GAAP, a qualified report may be necessary. However, in this case, since there is no departure from GAAP, a qualified report is not appropriate. A scope limitation would only be applicable if the auditor was unable to obtain sufficient evidence to support a material account balance or disclosure, which is not the case here. Therefore, the best choice is C.

Management Believes and the Auditor Is Satisfied,that a Material Loss