Uncertainty Concerning Future Events. Vilma Castro, Contador Público Autorizado, has completed field work for her examination of the Wigwam Winche company of Panama City, Panama, for the year ended December 31, 20X1, and now is in the process of determining whether to modify her report. Presented below are two independent, unrelated situations which have arisen.
Situation 1
In September, 20X1, a lawsuit was filed against Wigwam to have the court order it to install pollution-control equipment in one of its older plants. Wigwam's legal counsel has informed Castro that it is not possible to forecast the outcome of this litigation. However, Wigwam's management has informed Castro that the cost of the pollution-control equipment is not economically feasible and that the plant will be closed if the case is lost. In addition, Castro has been told by management that the plant and its production equipment would have only minimal resale values and that the production that would be lost could not be recovered at other plants.
Situation 2
During 20X1, Wigwam purchased a franchise amounting to 20 percent of its assets for the exclusive right to produce and sell a newly patented product in the northeastern USA. There has been no production in marketable quantities of the product anywhere to date. Neither the franchiser nor any franchisee had conducted any market research with respect to the product. In deciding the type of report or modification, if any, Castor will take into account such considerations as follows:
1 Uncertainty of outcome
2 Likelihood of error
3 Expertise of the auditor
4 Pervasive impact on the financial statements
5 Inherent importance of the item
Required:
Discuss Castro's type of report decision for each situation in terms of the above and other appropriate considerations. Assume each situation is adequately disclosed in the notes to the financial statements. Each situation should be considered independently. In discussing each situation, ignore the other.