17-42. Your firm audits Metropolitan Power Supply (MPS). The issue under consideration is the treatment in the company's financial statements of 5700 million in capitalized construction costs relating to Eagle Mountain, a partially completed nuclear power plant. Seven years ago, MPS began construction of Eagle Mountain, with an original cast estimate of $400 million and completion expected within five years. Cost overruns were cnormous, and construction has been repeatedly delayed by litigation initiated by the antinuclear lobby. At preseat, the project is little more than 50 percent complete, and construction has been halied because MPS does not have the funds to continue. If Eagle Mountain is ultimately completed, the state utilities commission will determine the extent to which MPS may recover its construction costs through its rate structure. The commission's rulings are difficult to predict, but it is quite possible that the commission will not allow MPS to include all of the Eagle Mountain construction costs in its "rate buse." If Eagle Mountain were abandoned today, none of the construction costs would be recoverable. The related write-off would amount to over 70 percent of MPS's stockholders' equity, but the company would survive. MPS's management, however, remains committed to the completion of the Eagle Mountain facility. Management has obtained authorization from the company's stockholders to issue $500 million in bonds and additional shares of common stock to finance completion of the project. If MPS incurs this additional debt and is still not able to make Eagle Mountain fully operational, it is doubtful that the company can avoid bankruptcy. In short, management bas elected to gamble-all its chips are riding on Eagle Mountain. a. Discuss the arguments for and against the auditon insisting that MPS begin expensing some portion of the construction costs rather than continuing to accumulate an everincreasing asset. Indicate the position you would take as the auditor. b. Discuss whether the auditors should modify their report because of uncertainty about whether or not MPS can remain a going concern. Indicate the type of opinion that you would issue. (You need not limit yourself to a "going-concern" modification.) Parta: FASB Accounting Standards Codification sections 36010 and 45020252. Part b: AICPA AU-C sections 570 and 700-706: PCAOB AS sections 2415 and 3101 . 17.-36 The auditors' report that folluws wan deafted hy a atafl accountant of Smith a. Co. CHPR. ial the completion oif the abdit of the financial atatrostss af Lenes Cu. (a pablic company) for the year ended December 31. Zos?. Report of Independent Public Accounting Firm To the Manabement of Lerses Co. Opirwan on mhe Financioi Statements We have examined the accompanying balance sheets of Lenses Co. the "Coerpary" as of December 31. 207, and 20X5. the reinted stasements of income, comprehersive income. stockinolders equity. and cash flows. for each of the three years in the period ended Decenber 31, 200\%, and the related nates fand schedidesf fccolectively referted to as the "finocia statementsh. in our opinich, the financiat statements present, in all material respects. the financial positon of the Compary as at December 31 . 207 and 20x6, and the results of its operations and its cash flown for exch of the three yoars in the period ended December 31, 20x7, in conforroty with accounting poincies generally accepted in the United States of Americo npplied on a consistent bess. We abo have reviewed, in accordance with standards of the Puble Company Accounting Qversight Board (United States) (PCAOB') the Compony's intersel control orer financiat reporting as of Decermber Orgencations of the Treockoy Cammission (cosol and our report oated Fobruary 12.208, and our repont apressed an unqualified epinipn. Blosis for Opinion These Ginancial statements ate the respoosiblty of the Conouny tr manogement: Our responsibilify is to eopress an opinion on the Company's financlal atamements bosed on our audits. We are a public accounting fart registered with the PCAOB and ave tequired to be independent with respect to the Company in accordance with the US, federal securitues lans and the acolicable riles and regulations of the Securities and Exchange Commission and the PCAO8. We conducted our audis in accordance with generaly accepted auding standards. Thooe standares require that we plan and peiform the oudit to obtain positive assurance oboul whweher the financiat wate-nents are free of all misstatement. whether doe to errot or frade. Our audits included performing procedires to assess the risks of material mise stmentent of the financiul statements, whether due to ener ee fraud, and performing procedures that respond to those risks, Such procedures included exomining. on a tast basis. evidence regarding the anounts and diselosures in the financial staternerts Qur madts aso incloded evaluating the accourt:ing prinoples used and significant estimates made by management, as wel as evaluating the overall presertabien of the financial statements. We beleve that our audis provide a reasionable basis for our opinion. Chical Ajalt Rettren The citical audit matters communicated beiow are marters arsing from the current period audit of the financial statements that were communicated or required to be communicated to the audit cormmittee and that (1) relate to missuatements that are material to the tinancial statements and (2) involvect our especialy chalenging, subjective, or complix, udigments. The cochmunication of citical aucfit matters serves as a second form of ossuronce on the financlat atuements, does not alter in ary form our opinion on the financial stutements, taken as a wholo, and we ars not, by cochmunicating the critical audit mat: ters below, prowiding separate opinions on the critical avest mantess or on the accounts or digclasures to ariet they relate. Wou mur assume critical nudit mathers are approgriately preserited. Wearey C Cos Cortfied Pubiic Accountants Los Angries, Callornie Fedruar: 12,208 Idectify deviations frumi the public compary unnsulified report