Question

The accounting firm of Jovanovic and St. Pierre has discovered, during its audit of Robson Chemicals Inc., that the client is being sued for $3 million. Allegedly, one of its products exploded and severely injured a customer. In the firm’s discussion with Robson’s lawyers, Jovanovic and St. Pierre ascertained that it is very likely that Robson will indeed have to pay this entire amount when the lawsuit is resolved. To provide for this, Robson’s chief financial officer has included information relating to the lawsuit in the notes to its financial statements but did not otherwise reflect it in its financial statements.

What types of audit opinion could be issued? Please give reasoning. Multiple answers are possible.

1-Unqualified report

2-Unqualified with emphasis of matter paragraph regarding the lawsuit

3-Qualified report due to a scope limitation

4-Qualified report due to a GAAP departure

5-Adverse opinion

6-Denial of opinion

Answer 1

Answer :

There can be multiple answers as under

2. Unqualified with emphasis of matter paragraph regarding the lawsuit

1. Unqualified report.

The audit firm Jovanovic and St. Pierre were knowing the facts and also had discussion with lawyers in relation to liability that may arise due to lawsuit filed by a customer. Auditors should have made provision this year at least major part of so called liability, say 60% and remaining 40% can be provided in next financial year. By just merely mentioning in the notes to financial statments is not true and authentic presentation of financial statements. Any liability likely to areise in future should be provided in the books of accounts either in the same financial year or in next atleast 1 or 2 year depending upon nature of arising of that liability and amount involved in it.