$3-10$ Drafting an Audit Report

On March $15,2008,$ you completed the audit of Excelsior Corporation's December $31,2007,$ financial statements, the second year you've supervised the engagement. The following information came to your attention during the engagement.

a$.$ Excelsior is presenting comparative financial statements.

b$.$ Excelsior does not wish to present a statement of cash flows for either year.

c$.$ During $2007,$ Excelsior changed its method of accounting for long$-$term construction contracts, reported the effect of the change in the current year's financial statements, and restated the prior year's statements. You are satisfied with Excelsior's justification for making the change, which is disclosed in Note $12.$

d$.$ Although unable to confirm accounts receivable, you used alternate procedures to satisfy yourself that receivables are presented fairly.

e$.$ Excelsior Corporation is the defendant in a litigation, the outcome of which is highly uncertain. If the case is settled in favor of the plaintiff, Excelsior will be required to pay a substantial amount of cash, which might require the sale of some plant assets. The litigation and the possible effects are disclosed in Note $11.$

f$.$ Excelsior issued debentures on January $31,2007,$ in the amount of $$10,000,000.$ The funds obtained from the issuance were used to finance the expansion of plant facili$-$ties. The debenture agreement restricts the payment of future cash dividends to earnings after December $31,2010.$ Excelsior declined to disclose this data in the notes to the financial statements.

Required: Draft an audit report.

$($AICPA Adapted$)$