Toady.com is a new public phone and internet company heavily financed by the Eastpac Bank. During your audit of Toady.com you have found that the business is in the practice of signing up new customers with very little in the way of credit checks. You are concerned that the disclosure of bad and doubtful debts may not accurately reflect the true situation of the company. You notice that if you apply the standards correctly the bad and doubtful debts will have such an effect on the financial statements that capital adequacy requirements may be breached.

When you approached management about the adequacy of these disclosures they told you that they were happy with the bad and doubtful debts at their current level, and that they would not be changing their method of application of the standard.

What is your first obligation? What type of auditor's report will you issue, and why?