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    Graham Company Audit Problem

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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.

    a. 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.
    b. Write the appropriate report, assuming you believe an adverse opinion is necessary.
    c. For discussion: Should you (could you) issue a report conforming to Rule 203 of the AICPA Code of Professional Conduct?

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    Solution Preview

    STEP 1
    Audit report assuming that the departure from GAAP is material but not enough to give an adverse opinion;
    We have audited the appended balance sheet of Graham Company as of December 31, 200x, and the related statement of income, retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the company's management. Our duty is to express an opinion on these statements based on our audit.
    We conducted our audit according with generally accepted auditing standards. Those standards require that we plan and carry out the audit to obtain realistic assurance about whether the financial statements are free of material misstatement. Our audit included examining, on a test basis, substantiation supporting the amounts and disclosures in the financial statements. The audit included assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
    Explanatory paragraph:
    The Graham Company has purchased land for the ...

    Solution Summary

    This posting discusses Graham Company situation where there is an increase in the value of land. It examines the implications for audit report.