Peter OSullivan, a public accountant, completed the audit of Sarawak Lumber Supply Co. Ltd. and issued a standard unqualified report. Subsequently, the company president, John Michaels, advised him that the firm needed a special audit report on three specific accounts: sales, net capital assets, and inventory valued at FIFO. The report is to be issued to Sarawaks lessor, who bases annual rentals on these three accounts. OSullivan was not aware of the need for the special report until after the financial statement audit was completed. In asking for the special audit report, John said to Peter: Youve already done the audit, so I imagine you can wrap this up pretty quickly. Youll bill me, what, another three or four hours?

Assume that you are OSullivan. Write a memo to Mr. Michaels, explaining the following:

Your memo should explain to Michaels the relationship between a financial statement audit and the special report audit procedures he now requires.

1. Why you are unlikely to be able to issue the special audit report without additional audit tests
2. What additional tests are likely to be needed before the special report can be issued