About two years ago, you were engaged to conduct an annual audit of Pierson Company. This was shortly after the majority stockholders assumed control of the company, and discharged the president and several other corporate officers. A new president canceled a wholesaler's contract to distribute Pierson Company products. The wholesaler is a Pierson Company minority stockholder and was one of the discharged officers. Shortly after you commenced your initial audit, several lawsuits were filed against Pierson Company by the wholesaler. Pierson Company filed countersuits.

None of the suits has been decided. The principal litigation is over the canceled contract and the other suits are claims against the company for salary, bonus, and pension fund contributions. Pierson Company is the plaintiff in suits totaling approximately \(\$ 300,000\) and defendant in suits totaling approximately \(\$ 2\) million. Both amounts are material in relation to net income and total assets. Pierson's legal counsel believes the outcome of the suits is uncertain and will remain so for an extended time.

You were instructed by the board of directors each year to issue an audit report only if it contained an unqualified opinion. Pierson Company refuses to provide for an unfavorable settlement in the financial statements because legal counsel advised the board of directors that such a provision in the financial statements could be used against Pierson by the opposition in court. The pending litigation was fully disclosed in a footnote to the financial statements, however.

You did not issue a report on the completion of your audit one year ago and you have now completed your second annual audit. The scope of your audits was not restricted in any way and you would render unqualified opinions if there were no pending litigations. You have attended all meetings of the stockholders and the directors and answered all questions directed to you at these meetings. You were promptly paid for all work completed to the current date. The board of directors of Pierson Company invited you to deliver to them an audit report containing an unqualified opinion or to attend the annual meeting of the stockholders one week hence to answer questions concerning the results of your audit if you are unwilling to render an unqualified opinion.

Required:

a. Discuss the issues raised for the CPA by the fact that he attended the stockholders' and directors' meetings and answered all questions addressed to him. Do not consider the propriety of his failure to issue a written audit report.

b. Should a CPA issue his audit report promptly after he has completed his examination? Why?

c. 1. What kind of auditor's opinion would you render on Pierson Company's financial statements for the year just ended? Why? (You need not write an auditor's opinion.)

2. Informative disclosures are usually contained in the middle paragraph of the auditor's report. Write the middle paragraph that you would include in your auditor's report for Pierson Company's financial statements for the year just ended.