REPORTS ON AUDITING FINANCIAL STATEMENTS

CHAPTER CH12

EXERCISE 12.66

Departures from GAAP.

On January 1, Graham Company purchased land (the site of a new building) for $100,000. Soon thereafter, the state highway department announced that a new feeder road would run next to the site. The effect was a dramatic increase in local property values. Comparable land located nearby sold for $700,000 in December of the current year. Graham presents the land at $700,000 in its accounts and, after reduction for implicit taxes at 33 percent, the fixed asset total is $400,000 higher than historical cost with the same amount shown separately in the shareholder equity account Current Value Increment. The valuation is fully disclosed in a footnote to the financial statements with a letter from a certified property appraiser attesting to the $700,000 value.

Required:

a. Draft the appropriate auditors' report, assuming that you believe the departure from GAAP is material but not pervasive enough to cause you to issue an adverse opinion.

b. Draft the appropriate auditors' report, assuming that you believe an adverse opinion is necessary.