During the current year, your client, U Company, acquired B Company in a business combination accounted for as a pooling-of-interest. B Company previously had reported on a fiscal year ending on June 30, whereas U Company used a year ending December 31. Considerable time and cost would be involved in restating and auditing the prior-year financial statements of B Company on a December 31 year-end for combination with U Company on a poolingof-interest basis. The management of U Company decides to combine B Company for the current year, which they believe is most important to readers of the financial statements, but not for prior years, because they do not consider the extra cost justified. You think the financial statements of B Company are significant in relation to those of U Company in the current and prior years, and that failure to combine them for the prior year would make the financial statements of that year misleading. Current and one-year-prior financial statements are to be included in the annual report.

a. Discuss the propriety of management's position regarding the restatement of current and prior-year financial statements.

b. Explain the reporting problems, if any, in the case.

c. Draft an appropriate audit report.