Your firm has just accepted the audit appointment of Floss Ltd., a major confectionery retailer with more than 60 leased stores in shopping malls across Canada. Every lease calls for a base rent plus a percentage of the store's sales. The "sales escalation" clause in each lease requires Floss Ltd, to have its auditor issue a report to the lessor on the sales of the store covered by the lease. However, the leases do not spec- ify the nature and extent of the audit effort or the form of the report.

The audited financial statements show only the aggregate figure for sales at all stores, and the previous audits had involved visiting only some of the locations each year on a rotating basis. The former auditors had not extended their procedures for the purposes of reporting to lessors, but had simply reported to individual lessors the following:

As requested by Floss Ltd., we report that the sales of the corporation's store in Penticton Plaza for the year ended September 30, 2001, are recorded in the amount of $_ in the general ledger sales account of the corporation.

Our examination of the corporation's financial statements for the year ended June 30, 2001, was not directed to the determination of sales of individual stores, nor have we examined the corporation's financial statements for the three-month period subsequent to June 30, 2001. We have not performed an audit of, and accordingly do not express an opinion on, the amount of sales referred to in the pre¬ ceding paragraph.

This year several lessors, including one that owns nine malls containing Floss Ltd. stores, have objected to this report, stating that it provides them with no assurance that sales at individual store locations are fairly stated. You, as a representative of your firm, have explained to the management of Floss Ltd. that it would cost considerably more in time and audit effort to provide an audit opinion on sales at each particular store location.

The management of Floss Ltd. is very unhappy with the prospect of paying the extra costs for an individual audit of sales at each location. The chief financial officer has observed that "it seems to us that your firm should be able to give some reasonable intermediate level of assurance between nothing, which is what the former auditors' reports seem to indicate, and a full scope audit opinion." In particular, the officer has asked why your firm cannot simply report, solely on the basis of your financial statement audit, as follows:

As requested by Floss Ltd., we report that, in our opinion, the sales of the corporation's store at Hilltop Plaza (Hamilton, Ontario) for the year ended September 30, 2001, in the amount of $_are fairly stated in all respects material to the financial statements taken as a whole.

Required Discuss the three reporting approaches identified by the chief financial officer of Floss Ltd. and any other reporting approaches that could satisfy both Floss Ltd. management and the lessors.

(CICA adapted)