You have been engaged to audit W Company, a new company formed to explore for oil and gas. During the year, W Company acquired several large undeveloped lease holdings for \(\$ 1\) million and drilled several exploratory wells, all of which were dry. At December 31, 19X4, the financial statements showed total assets of \(\$ 1.1\) million (including the cost of the undeveloped leases) and net worth of \(\$ 400,000\). In your discussion with the management of W Company regarding the recoverability of the cost of the leases, they maintain that, despite the unsuccessful efforts to date, the cost of the leases could be recovered, because the geologic features underlying certain of the leases are favorable for the formation of hydrocarbons and a productive oil well recently had been drilled near their leases. They supply you with an opinion of an outside geologist and other documentary support for their position.

a. What type of audit report would you issue to W Company? Explain your reasons fully.

b. Draft the audit report you will issue, assuming that you are otherwise satisfied with the financial statements.

c. Assume that management believes that the leases probably will not be productive of oil or gas but insists that they be shown in the financial statements at cost, as this presentation would be in accordance with generally accepted accounting principles. Would this change the type of audit report you would issue? Explain why or why not.

d. Draft the audit report you would issue on the basis of the assumption in (c), if it would differ from the report you drafted in (b).