Events After Balance Sheet Date. Rodrigo Acosta, Contador Publico Autorizado (CPA), was engaged by the board of directors of Estrellita Company of Guayaguil, Equador, to audit Estrellita’s calendar year 20X8 financial statements. The following report was drafted by an audit assistant at the completion of the engagement. It was submitted to Acosta for review on 7 March 20X9, the date of the completion of fieldwork. Acosta has reviewed matters thoroughly and properly concluded that an adverse opinion was appropriate.

Acosta also became aware of a 14 March 20X9 subsequent event which the client has properly disclosed in the notes to the financial statements.

Acosta wants responsibility for subsequent events to be limited to the specific event referred to in the applicable note to the client’s financial statements.

The financial statements of Estrellita Company for the calendar year 20X7 were examined by predecessor auditors who also expressed an adverse opinion and have not reissued their report. The financial statements for 20X7 and 20X8 are presented in comparative form.

To the President of Estrellita Company:

We have audited the accompanying balance sheet of Estrellita Company as of 31 December 20X8, and the related statements of income, retained earnings, and cash flows for the year then ended.

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. As discussed in Note K to the financial statements, the Company has properly disclosed a subsequent event dated 14 March 20X9.

We conducted our audit in accordance with International Standard on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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.

In our opinion, except for the matters discussed in the first and the final paragraphs of this report, the financial statements referred to above present fairly, in all material respects, the financial position of Estrellita Company as of 31 December 19X8, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year.

As discussed in Note G to the financial statements, the Company carries its property and equipment at appraisal values, and provides depreciation on the basis of such values. Further, the company does not provide for income taxes with respect to differences between financial income and taxable income arising because of the use, for income tax purposes, of the installment method of reporting gross profit from certain types of sales. We believe that these appraisal values are reasonable.

Rodrigo Acosta, Contador Publico Autorizado 7 March 20X9

Required

Identify the deficiencies in the draft of the proposed report. Do not redraft the report or discuss corrections.