Question

18-25 Devon, Inc., engaged Rao to examine its financial statements for the year ended December 31, 2018. The financial statements of Devon, Inc., for the year ended December 31, 2017, were examined by Jones, whose March 30, 2018, auditor's report expressed an unqualified opinion. The report of Jones is not presented with the 2018-2017 compara- tive financial statements. Rao's working papers contain the following information that is not reflected in footnotes to the 2018 financial statements as prepared by Devon, Inc.: • One member of Devon's board of directors, who was appointed in 2018, was for- merly a partner in Jones' accounting firm. Jones' firm provided financial consult- ing services to Devon during 2016 and 2015, for which Devon paid approximately $1,600 and $9,000, respectively. Devon refused to recognize certain liabilities relating to finance-lease obligations for equipment acquired in 2018. Recognizing the liabilities associated with the leases in conformity with generally accepted accounting principles would have increased assets and liabilities by $312,000 and $387,000, respectively; decreased retained earnings as of December 31, 2018, by $75,000; and decreased net income and earnings per share by $75,000 and $.75, respectively, for the year then ended. . During the year, Devon changed its method of valuing inventory from the first-in. first-out method to the last-in, first-out method. This change was made because management believes LIFO more clearly reflects net income by providing a closer matching of current costs and current revenues. The change had the effect of reducing inventory at December 31, 2018, by $65,000 and net income and earnings per share by $38,000 and $.38, respectively, for the year then ended. The effect of the change on prior years was immaterial; accordingly, the change had no cumulative effect. Rao supports the company's position, agreeing that it is justified. After completing the fieldwork on February 28, 2019, Rao concludes that the expres- sion of an adverse opinion is not warranted.

Answer 1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of Devon Incorporated

We have audited the consolidated balance sheet of Devon Incorporated as of December 31, 2018, and the related consolidated statement of operations, stockholders' equity, and cash flows for the period ended December 31, 2018. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of Devon Incorporated for the year ended December 31, 2017, were audited by other auditors, whose report dated March 30, 2018, expressed an unqualified opinion on those statements.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

During the year, Devon changed its method of valuing inventory from the first-in, first-out method to the last-in, first-out method. This change was made because management believes LIFO more clearly reflects net income by providing a closer matching of current costs and current revenues. The change had the effect of reducing inventory at December 31, 2018, by $65,000, and net income and earnings per share by $38,000 and $0.38, respectively, for the year then ended. The effect of the change on prior years was immaterial; accordingly, there was no cumulative effect of the change.

The Company has excluded, from property and debt in the accompanying balance sheet, certain lease obligations that, in our opinion, should be capitalized in order to conform to generally accepted accounting principles. If these lease obligations were capitalized, property would be increased by $312,000 and long-term debt by $387,000, and retained earnings would be decreased by $75,000 as of December 31, 2018. Additionally, net income and earnings per share would be decreased by $75,000 and $0.75, respectively, for the year then ended.

In our opinion, except for the effects of not capitalizing lease obligations, and except for not disclosing the change in inventory methods as discussed in the preceding paragraphs, the financial statements referred to above present fairly, in all material respects, the financial position of Devon Incorporated as of December 31, 2018, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Devon Incorporated’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2019 expressed an unqualified opinion that Devon Incorporated maintained, in all material respects, effective internal control over financial reporting.

Rao.