Your client, S Company is a major manufacturer of widgets. Your audit report for the previous year was unqualified. During the current year, several class- action suits were filed against the company claiming significant damages as a result of alleged price fixing within the widget industry during the previous three years. The company is contesting the suits, and in connection with the current- year audit, legal counsel for S Company has furnished you a letter stating that they are optimistic, but still uncertain, as to the final outcome of these suits. You conclude that it is reasonably possible that the outcome of the suit will be adverse to S Company.

a. Discuss the reporting problem involved in the case.

b. Draft an audit report covering two years based on the information provided.