What audit opinion would be reported?

The Vaughan audit team completed its audit field work on February 15, 2010. A conference was held on that date involving members of the audit firm and Bronys Bikes management. Participants in the conference were Denise Vaughan, partner in charge of the Bronys Bikes engagement; Carolyn Volmar, audit manager; Richard Derick, in-charge auditor; Trevor Lawton, Bronys Bikes CEO; Gerald Groth, Bronys Bikes controller; and Marlene McAfee, Bronys Bikes treasurer. The Bronys Bikes representatives agreed to all of the audit adjustments and reclassifications proposed by the audit team, and they agreed to reflect them in the December 31, 20X9, financial statements. They also agreed to modify and/or add footnote disclosures as recommended by the audit team.

At the conclusion of the conference, the audit team obtained a client representation letter from Bronys Bikes management and presented management with a copy of the significant deficiencies letter outlining discovered internal control deficiencies. The original of this letter was sent to Bronys Bikes audit committee.

The legal action initiated against Bronys Bikes by Rollfast, a competitor, for alleged patent infringement, was not yet settled as of February 15. Because the letter obtained by Derick from Bronys Bikes outside legal counsel was inconclusive as to the probable outcome of this action, Derick requested an informal conference with the attorney handling Bronys Bikes case. This conference was convened on February 12, and the participants were Joel Haskins, the attorney, Gerald Groth, Denise Vaughan, and Richard Derick.

Haskins exhibited a degree of pessimism that produced considerable uncertainty as to the probable outcome of the litigation. Inasmuch as the amount of loss could be quite substantial, and the probability of an unfavorable outcome was more than remote but less than likely, Groth agreed to disclose the matter in a footnote to the 20X9 financial statements.

Notwithstanding the liquidity problems and loan default, Bronys Bikes has been assured by Bank Two management that the bank plans no foreclosure action, provided Bronys Bikes can restore the minimum required bank balance and continues to earn profits. Moreover, managements expressed plans for dealing with the crisis and continued sales growth during January 20Y0 have convinced Vaughan that an explanatory paragraph expressing substantial doubt as to continued existence is not necessary.

No scope restrictions were encountered during the audit, either imposed or otherwise. Also assume that Bronys Bikes did not change accounting principles in either 20X8 or 20X9.