Leer, CPA, has discussed various reporting considerations with three of Leer's audit clients. The three clients presented the following situations and asked how they would affect the audit report.

1. A client has changed its concept of "funds" on its statement of changes in financial position. Both Leer and the client agree that the new concept of "funds" is a more meaningful presentation. In prior years, when Leer issued an unqualified report on the client's comparative financial statements, this statement showed the net change in working capital, whereas in the current year the statement shows net change in cash balance. The client agrees with Leer that the change is material but believes the change is obvious to readers and need not be discussed in the footnotes to the financial statements or in Leer's report. The client is issuing comparative statements but wishes only to restate the prior year's statement to conform to the current format.

2. A client has a loan agreement that restricts the amount of cash dividends that can be paid and requires the maintenance of a particular current ratio. The client is in compliance with the terms of the agreement and it is not likely that there will be a violation in the foreseeable future. The client believes there is no need to mention the restriction in the financial statements because such mention might mislead the readers.

3. During the year, a client correctly accounted for the acquisition of a majority-owned domestic subsidiary but did not properly present the minority interest in retained earnings or net income of the subsidiary in the consolidated financial statements. The client agrees with Leer that the minori y interest presented in the consolidated financial statements is materially misstated but takes the position that the minority shareholders of the subsidiary should look to that subsidiary's financial statements for information concerning their interest therein.

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Each of the situations above relates to one of the four generally accepted auditing standards of reporting.

Identify and describe the applicable GAAS of reporting in each situation and discuss how the particular client situation relates to the standard and to Leer's report. Organize your answer sheet as follows:

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Situation No. Applicable GAAS of Reporting Discussion of Relationship of Client Situation to Standard of Reporting and to Leer's Report.