Question

Management of Edgington Industries plans to disclose an uncertainty as follows:

The Company is a defendant in a lawsuit alleging infringement of certain patent rights and claiming damages. Discovery proceedings are in progress. The ultimate outcome of the litigation cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication has been made in the accompanying financial statements.
The auditor is satisfied that sufficient audit evidence supports management's assertions about the nature and disclosure of the uncertainty. What type of opinion should the auditor express under these circumstances under U.S. auditing standards?
A. Un-modified with an emphasis-of-matter paragraph.
B. "Except for" qualified.
C. Un-modified without an emphasis-of-matter paragraph.
D. Disclaimer of opinion.

Answer 1

The correct option is D) Disclaimer of Opinion

Step-by-step explanation:

According to the Generally Accepted Accounting Principles or GAAP which forms the basis for U.S auditing standards, the auditor is required to express a Disclaimer of Opinion when:

• the auditor is not a neutral party to the business or there is conflicting interest;
• the client imposes a cap on the scope of the audit thus limiting the ability of the auditor to obtain sufficient audit-proof;
• (a) major uncertainty(ies) occur(s) in the client's company.

Cheers!

Answer 2

The correct option is option A) The type of opinion the auditor should express under these circumstances under U.S. auditing standards is Un-modified with an emphasis-of-matter paragraph.

Step-by-step explanation:

Since the auditor is satisfied that sufficient audit evidence supports management's assertions about the nature and disclosure of the uncertainty, his/her opinion will be un-modified.

Unmodified opinion is the opinion where auditor expresses an opinion that financial statements are presented, in all material respects, in accordance with applicable financial reporting framework.

However, there is need for emphasis of matter paragraph to indicates that the auditor's opinion is not modified with respect to the matter emphasized because the ultimate outcome of the litigation cannot presently be determined.