Problem:

For each of following independent situations, point out the type of financial statements audit report which you would issue and briefly describe your reasoning. Suppose that each item is important.

1. Walker Computers is suing your client Super Software, for royalties over patent infringement. Super Software’s outside legal counsel assures you that Walker’s case is totally devoid of merit.

2. The accounting records for cash sales of your client, Temptations, aren’t adequate for audit purposes and you’ve been incapable to acquire reasonable assurance that all cash sales have been properly recorded. The possible effects on financial statements are material, but not pervasive.

3. You’ve detected that the information about this year’s sales in management’s report contained in your client’s annual report is materially inconsistent with sales report in the audited financial statements. You’ve determined that the information in management’s reports needs revision, but the information hasn’t been revised.