You have been engaged to audit the December 31, 19X4 financial statements of the Frio Equipment Corporation, which was formed in 19X0 and sells or leases construction equipment such as bulldozers, road scrapers, dirt movers, and so forth to contractors. The corporation at year-end has 50 pieces of equipment leased to 30 contractors who are using the equipment at various locations throughout your state. The Frio Equipment Corporation is identified as the owner of the leased equipment by a small metal tag that is attached to each machine. The tag is fastened by screws so that it can be removed if the machine is sold. During the audit you find that the contractors often buy the equipment that they have been leasing, but the identification tag is not always removed from the machine. The corporation's principal asset is the equipment leased to the contractors. While there is no plant ledger, each machine is accounted for by a file card that gives its description, cost, contractor-lessee, and rental payment records. The corporation's control risk is high. You were engaged upon the recommendation of the president of the local bank. The Frio Equipment Corporation, which had never had an audit, had applied to the bank for a sizable loan; the bank president had requested an audited balance sheet. You barely know John Frio, the principal stockholder and president of the Frio Equipment Corporation; he has a reputation for expensive personal tastes and for shrewd business dealings, some of which have bordered on being unethical. Nevertheless, Mr. Frio enjoys a strong personal allegiance from his contractor- lessees, whose favor he has curried by personal gifts and loans. The lessees look upon Mr. Frio as a personal friend for whom they would do almost anything. Often they overlook the fact that they are dealing with the corporation and make their checks payable to Mr. Frio, who endorses them over to the corporation. 

1. List the audit procedures that you would employ in the audit of the asset account representing the equipment leased to the contractors. 

2. Although your audit procedures, including those you described in answering part 1, did not uncover any discrepancies, you have been unable to dismiss your feeling that Mr. Frio and some of the contractor-lessees may have collaborated to deceive you. Under this condition discuss what action, if any, you would take and the effect, if any, of your feeling upon your auditor's opinion. (Assume that you would not withdraw from the engagement.)