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    Audit Reports: Departure from GAAP

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    On January 1, Graham Company purchased land (the site of a new building) for $100,000. Soon thereafter, the Highway Department announced a new feeder roadway route that would run alongside the site. The effect was a dramatic increase in local property values. Nearby comparable land sold for $700,000 in December of the current year. Graham shows the land at $700,000 in its accounts, and, after reduction for implicit taxes at 33 percent, the fixed asset total is $400,000 larger, with the same amount shown separately in a stockholders' equity account titled"Current value increment." The valuation is fully disclosed in a footnote to the financial statements, along with a letter from a certified property appraiser attesting
    to the $700,000 value.

    Write the appropriate audit report, assuming you believe the departure from GAAP is material but not enough to cause you to give an adverse opinion.

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    Solution Preview

    The Board of Directors and Stockholders
    Graham Company

    We have audited the accompanying balance sheet of Graham Company as of December 31, 2006, and the related statement of income and stockholders' equity, and cash flows for the period ended December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

    We conducted our audits in accordance with the ...

    Solution Summary

    The solution presents a qualified audit report in proper form which discloses the nature of the GAAP departure.