The Following Is a Portion of an Adverse Audit Report

question 3

Essay

The following is a portion of an adverse audit report issued for a public company.(Note: A separate report was issued on the effectiveness of internal control over financial reporting.)
Independent Auditor's Report
To the shareholders of Wallace Corporation
We have audited the accompanying balance sheet of Wallace Corporation as of December 31, 2012, and the related statements of income, retained earnings, and cash flows for the year 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.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion.
The company has excluded from property and debt in the accompanying balance sheet certain lease obligations that, in our opinion, should be capitalized in order to conform with generally accepted accounting principles.If these lease obligations were capitalized, property would be increased by $14,500,000, long-term debt by $13,200,000, and retained earnings by $1,300,000 as of December 31, 2012, and net income and earnings per share would be increased by $1,300,000 and $2.25, respectively, for the year then ended.
Required:
Complete the above adverse audit report by preparing the opinion paragraph.Do not date or sign the report.

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Definitions:

Economies of Scale

Cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.

Natural Monopoly

A monopoly that exists when increasing returns to scale provide a large cost advantage to having all output produced by a single firm.

Network Externalities

The effect that an additional user of a good or service has on the value of that product to others, often positive, as in the case of telecommunications networks.

Monopolist

A monopolist is a single supplier in a market who has significant control over prices and the availability of a product or service.