$3-6$ Audit Report Deficiencies

The following audit report was drafted by an associate and submitted to the engagement partner in the accounting firm of Better & Best, LLP$.$

To the Audit Committee of American Widgets, Inc.:

We have audited the consolidated balance sheets of American Widgets, Inc., and subsidiaries as of December $31,2008$ and $2007,$ and the related consolidated statements of income, retained earnings, and cash flows for the years 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. Other auditors examined the financial statements of certain subsidiaries and have furnished us with reports thereon containing no exceptions. Our opinion expressed herein, insofar as it relates to the amounts included for those subsidiaries, is based solely upon the reports of the other auditors.

As discussed in Note $4$ to the financial statements, on January $8,2006,$ the company halted the production of certain medical equipment as a result of inquiries by the Food and Drug Administration, which raised questions as to the adequacy of some of the Company's sterilization equipment and related procedures. Management is not in a position to evaluate the effect of this production halt and the ensuing litigation, which may have an adverse effect on the financial position of American Widgets, Inc.

As fully discussed in Note $7$ to the financial statements, in $2008$ the Company extended the use of the last$-$in$,$ first$-$out $($LIFO$)$ method of accounting to include all inventories. In examining inventories, we engaged Dr$.$ Irwin Same $($Nobel Prize winner, $1997)$ to test check the technical requirements and specifications of certain items of equipment manufactured by the Company.

In our opinion, except for the effects, if any, on the financial statements of the ultimate resolution of the matter discussed in the second preceding paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of American Widgets, Inc., as of December $31,2008,$ and the results of operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.

To be signed by

Better & Best, LLP

March $1,2006,$ except for Note $4$ as to which the date is January $8,2006$

Required: Identify the deficiencies in the accountant's proposed report.

$($AICPA Adapted$)$

$3-7$ Drafting an Audit Report

On January $15,2008,$ Marc David, CPA, was engaged to audit Kristin Manufacturing Company's December $31,2007,$ financial statements. Kristin had taken a physical inventory on December $31,2007$; the carrying value of the final priced inventory was $$275,400($$$263,000$ in $2006),$ which represented approximately $10$ percent of total assets. David was unable to satisfy himself as to inventory quantities through other auditing procedures because of the condition of Kristin's inventory records.

Required: Draft an audit report assuming no other circumstances require departure from a standard audit report.