QUESTION: 25
Digit Co. uses the FIFO method of costing for its international subsidiary's inventory and LIFO
for its domestic inventory. Under these circumstances, the auditor's report on Digit's financial
statements should express an:

A. Unqualified opinion.
B. Opinion qualified because of a lack of consistency.
C. Opinion qualified because of a departure from GAAP.
D. Adverse opinion.

Answer(s): A
Explanation:
Choice "a" is correct. GAAP allows a company to use different methods for costing different
inventories as long as the methods are disclosed. Thus, the audit report would be unqualified;
there is no departure from GAAP.
Choice "b" is incorrect. The consistency standard refers to changes in application of accounting
practices between periods, affecting the comparability of financial statements. There is no
indication Digit made any change in methods.
Choice "c" is incorrect. Use of different methods for costing inventory is permissible under
GAAP, and would not result in a qualification of the auditor's report. Choice "d" is incorrect. Use
of different methods for costing inventory is permissible under GAAP, and would not result in an
adverse report.
QUESTION: 26
In which of the following circumstances would an auditor not express an unqualified opinion?

A. There has been a material change between periods in accounting principles.
B. Quarterly financial data required by the SEC has been omitted.
C. The auditor wishes to emphasize an unusually important subsequent event.
D. The auditor is unable to obtain audited financial statements of a consolidated investee.

Answer(s): D
Explanation:
Choice "d" is correct. The inability to obtain audited financial statements of a consolidated
investee represents a scope limitation which may result in either a qualified opinion or a
disclaimer of opinion. Choice "a" is incorrect. A material change in accounting principles
between periods is disclosed in an explanatory paragraph added to an otherwise unqualified
opinion. Choice "b" is incorrect. Omission of selected quarterly data required by SEC
regulations is disclosed in an explanatory paragraph added to an otherwise unqualified opinion.
Choice "c" is incorrect. Emphasis of a matter is disclosed in an explanatory paragraph added to
an otherwise unqualified opinion.
QUESTION: 27
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.

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