Y Company has never been audited and is to be acquired by one of your present clients and combined on a pooling-of-interest basis. Your client includes ten years of financial statements in its annual report and has instructed you to audit Y Company for the previous ten years so that ten years of restated financial statements can be included in the annual report again this year. During this audit, you note that \(\mathrm{Y}\) Company has substantial gains from sales of longterm investment securities in \(19 \times 7\) and 19X8. However, the gains in 19X7 were presented as extraordinary items, whereas the \(19 \times 8\) gains were reported as part of ordinary operations. You find that the different reporting was caused by a change in the criteria for extraordinary items contained in the professional literature that became effective in late 19X7. Thus, both transactions were reported properly in conformity with the accounting principles in effect during the respective years, and the inconsistency arose from action taken by a standard setting body, not Y Company.

a. Will you modify your audit report for lack of consistency? Explain your reasoning.

b. Draft the audit report you will issue, assuming that you have no other reservations regarding the financial statements.