The controller of Fair City Hotels Co. will not allow you to conrm the receivable balance from two of its major customers.

1. The controller of Fair City Hotels Co. will not allow you to confirm the receivablebalance from two of its major customers. The amounts of the receivables arematerial in relation to Fair City’s financial statements. You are unable to satisfyyourself as to the receivable balances by alternative procedures.2. In the last 3 months of the current year, Oil Refining Company decided to changedirection and go significantly into the oil drilling business. Management recognizesthat this business is exceptionally risky and could jeopardize the success of itsexisting refining business, but there are significant potential rewards. During theshort period of operation in drilling, the company has had three dry wells and nosuccesses. The facts are adequately disclosed in footnotes.3. Your client, Auto Rental Company, has changed from straight-line to sum-of-theyears’ digits depreciation. The effect on this year’s income is immaterial, but the effectin future years is likely to be material. The facts are adequately disclosed in footnotes.4. Kieko Technology Corporation has prepared financial statements but has decided toexclude the statement of cash flows. Management explains to you that the users oftheir financial statements find this statement confusing and prefer not to have itincluded.5. HardwareFromHome.com is an Internet-based start-up company created to sellhome hardware supplies online. Although the company had a promising start, adown turn in e-commerce retailing has negatively affected the company. The com -pany’s sales and cash position have deteriorated significantly, and you have reser -vations about the ability of the company to continue in operation for the next year.6. Approximately 20% of the audit of Fur Farms, Inc. was performed by a differentCPA firm, selected by you. You have reviewed their working papers and believe theydid an excellent job on their portion of the audit. Nevertheless, you are unwilling totake complete responsibility for their work.For each situation, do the following:a. Identify which of the conditions requiring a modification of or a deviation from anunqualified standard report is applicable.b. State the level of materiality as immaterial, material, or highly material. If you cannotdecide the level of materiality, state the additional information needed to make adecision.c. Given your answers in parts a and b, state the appropriate audit report from thefollowing alternatives (if you have not decided on one level of materiality in part b,state the appropriate report for each alternative materiality level):(1) Unqualified—standard wording(2) Unqualified—explanatory paragraph(3) Unqualified—modified wording(4) Qualified opinion only(5) Qualified scope and opinion(6) Disclaimer(7) Adversed. Based on your answer to part c, indicate which paragraphs, if any, should be modifiedin the standard audit report. Also indicate whether an additional paragraph isnecessary and its location in the report.

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