You are auditing Osakis Electronics USA, Ltd., a subsidiary of a Japanese company, and will issue an audit report covering the balance sheets as of December 31, 2003 and 2002 and the income statements and cash flow statements for the three years then ended. The company’s common stock is traded on the New York and Tokyo stock exchanges.

Each of the following are independent audit reporting situations.

1. Osakis does not disclose segment information, because Japanese accounting standards do not require it. The SEC does not require such disclosures in SEC filings of foreign issuers of securities.

Required:

Indicate the effect on your audit report, which will be widely used in the United States.

2. Osakis reports its inventory, fixed assets, depreciation, and cost of goods sold on a current-value basis. Such accounting violates the accounting standards of both Japan and the United States. There is disclosure of the pertinent facts, including the effect on key financial statement amounts, in footnote 13.

Required:

a. What factors should you consider in deciding whether to issue a qualified or an adverse opinion?

b. Draft the explanatory and opinion paragraphs for 1. A qualified opinion 2. An adverse opinion 

3. Osakis prepares two sets of financial statements; one set for use in Japan using Japanese accounting principles and the other set for use in the United States using U.S. GAAP. The Japanese set contains a footnote describing the accounting principles used.

Required:

How should you report on these two sets of statements?