Question

Essay Question:

Tick and Tie, CPAs, were performing their annual audit of Johnson Manufacturing Company, a nonpublic company. Johnson is currently being sued for $2,000,000 related to an alleged defective product that they sold to a customer. Johnson's legal counsel has told Tick and Tie that it is probable that Johnson will lose the suit and have to pay the entire $2,000,000. Johnson's management has included information in the footnotes about the lawsuit. However, Johnson has not recorded any loss or liability in the income statement or balance sheet.

Required essay: State the type of opinion should be issued on the company's financial statements and explain your rationale fully. Include which portions, if any, of the standard report would be modified and how the report would change. ​

Answer 1

Here given that a lawsuit is on the Johnson manufacturing company and we are the auditors of the company

By applying audit procedures we used the work of management expert for getting conclusion on the area of lawsuit pending on the name of organisation and found that one lawsuit can make 2000000 liability if we loose the case.

We taken the opinion of lawyer about the pending case and they said it is possible to loose the case and we have to pay 2000000.

Based on the opinion of the lawyer the management of the company mentioned that 2000000 in notes to accounts.

Contingent liabilities are the liabilities that may be incurred by an entity depending on the outcome of uncertain future event such as pending lawsuits and sudden government decisions.

Here the lawsuit on the organisation didn't got any judgement in the opinion expressed by the lawyer that the liability can be 2000000 is an estimate.

So as per above given contingent liability definition in the present situation in the question combinedly can be said that the Johnson manufacturing company has a contingent liability of 2000000

So the disclosure requirement of contingent liability is to be in the notes to accounts of financial statements.

Now the contingent liability of that 2000000 is to be represented in notes to accounts of financial statements.

So here the work done by management ab Johnson manufacturing limited is exactly correct.

As the work done by management is correct there is no need to modify the audit report or no need to make any modifications in the prepared and presented financial statements.

We as auditor of that company can give unmodified or clean opinion about the financial statements of Johnson manufacturing limited.

Conclusion the preparation and presentation of financial statements of Johnson manufacture limited is correct so there is no need to modify the financial statements and also only for modification in audit report and opinion expressed by auditor.

These are all the information required to solve the above given situation.

I hope, all the above given information and explanations are useful and helpful to you.

Thank you.