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Chapter 3 Audit Reports

Review Questions

3-1 Auditor's reports are important to users of financial statements because they inform users of the auditor's opinion as to whether or not the statements are fairly stated or whether no conclusion can be made with regard to the fairness of their presentation. Users especially look for any deviation from the wording of the standard unqualified report and the reasons and implications of such deviations. Having standard wording improves communications for the benefit of users of the auditors report. When there are departures from the standard wording users are more likely to recogni!e and consider situations requiring a modification or qualification to the auditors report or opinion. 3-2 "he unqualified audit report consists of# $. %. &. Report title Auditing standards require that the report be titled and that the title includes the word independent. Audit report address "he report is usually addressed to the company its stockholders or the board of directors. Introductory paragraph "he first paragraph of the report does three things# first it makes the simple statement that the '(A firm has done an audit. )econd it lists the financial statements that were audited including the balance sheet dates and the accounting periods for the income statement and statement of cash flows. "hird it states that the statements are the responsibility of management and that the auditor's responsibility is to e*press an opinion on the statements based on an audit. Scope paragraph. "he scope paragraph is a factual statement about what the auditor did in the audit. "he remainder briefly describes important aspects of an audit. Opinion paragraph . "he final paragraph in the standard report states the auditor's conclusions based on the results of the audit. Name of CPA firm. "he name identifies the '(A firm or practitioner who performed the audit. Audit report date. "he appropriate date for the report is the end of fieldwork when the auditor has gathered sufficient appropriate evidence to support the opinion.

+. ,. -. ..

"he same seven parts are found in a qualified report as in an unqualified report. "here are also often one or more additional paragraphs e*plaining reasons for the qualifications.

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3-3 "he purposes of the scope paragraph in the auditor's report are to inform the financial statement users that the audit was conducted in accordance with generally accepted auditing standards in general terms what those standards mean and whether the audit provides a reasonable basis for an opinion. "he information in the scope paragraph includes# $. "he auditor followed generally accepted auditing standards. %. "he audit is designed to obtain reasonable assurance about whether the statements are free of material misstatement. &. 0iscussion of the audit evidence accumulated. +. )tatement that the auditor believes the evidence accumulated was appropriate for the circumstances to e*press the opinion presented. 3-4 "he purpose of the opinion paragraph is to state the auditor's conclusions based upon the results of the audit evidence. "he most important information in the opinion paragraph includes# $. "he words 1in our opinion1 which indicate that the conclusions are based on professional 2udgment. %. A restatement of the financial statements that have been audited and the dates thereof or a reference to the introductory paragraph. &. A statement about whether the financial statements were presented fairly and in accordance with generally accepted accounting principles. 3-5 "he auditor's report should be dated 3ebruary $. %4$4 the date on which the auditor concluded that he or she had sufficient appropriate evidence to support the auditors opinion. 3-6 An unqualified report may be issued under the following five circumstances# $. All statements5balance sheet income statement statement of retained earnings and statement of cash flows5are included in the financial statements. %. "he three general standards have been followed in all respects on the engagement. &. )ufficient evidence has been accumulated and the auditor has conducted the engagement in a manner that enables him or her to conclude that the three standards of field work have been met. +. "he financial statements are presented in accordance with generally accepted accounting principles. "his also means that adequate disclosures have been included in the footnotes and other parts of the financial statements. ,. "here are no circumstances requiring the addition of an e*planatory paragraph or modification of the wording of the report.

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3-7 "he introductory scope and opinion paragraphs are modified to include reference to managements report on internal control over financial reporting and the scope of the auditors work and opinion on internal control over financial reporting. "he introductory and opinion paragraphs also refer to the framework used to evaluate internal control. "wo additional paragraphs are added between the scope and opinion paragraphs that define internal control and describe the inherent limitations of internal control. 3-8 When adherence to generally accepted accounting principles would result in misleading financial statements there should be a complete e*planation in a separate paragraph. "he separate paragraph should fully e*plain the departure and the reason why generally accepted accounting principles would have resulted in misleading statements. "he opinion should be unqualified but it should refer to the separate paragraph during the portion of the opinion in which generally accepted accounting principles are mentioned. 3-9 An unqualified report with an e*planatory paragraph or modified wording is the same as a standard unqualified report except that the auditor believes it is necessary to provide additional information about the audit or the financial statements. 3or a qualified report either there is a scope limitation 6condition $7 or a failure to follow generally accepted accounting principles 6condition %7. Under either condition the auditor concludes that the overall financial statements are fairly presented. "wo e*amples of an unqualified report with an e*planatory paragraph or modified wording are# $. %. "he entity changed from one generally accepted accounting principle to another generally accepted accounting principle. A shared report involving the use of other auditors.

3-10 When another '(A has performed part of the audit the primary auditor issues one of the following types of reports based on the circumstances. $. 8o reference is made to the other auditor. "his will occur if the other auditor audited an immaterial portion of the statement the other auditor is known or closely supervised or if the principal auditor has thoroughly reviewed the other auditor's work. 9ssue a shared opinion in which reference is made to the other auditor. "his type of report is issued when it is impractical to review the work of the other auditor or when a portion of the financial statements audited by the other '(A is material in relation to the total. "he report may be qualified if the principal auditor is not willing to assume any responsibility for the work of the other auditor. A disclaimer may be issued if the segment audited by the other '(A is highly material.

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3-11 :ven though the prior year statements have been restated to enhance comparability a separate e*planatory paragraph is required to e*plain the change in generally accepted accounting principles in the first year in which the change took place. 3-12 'hanges that affect the consistency of the financial statements may involve any of the following# a. 'hange in accounting principle b. 'hange in reporting entity c. 'orrections of errors involving accounting principles. An e*ample of a change that affects consistency would be a change in the method of computing depreciation from straight line to an accelerated method. A separate e*planatory paragraph is required if the amounts are material. 'omparability refers to items such as changes in estimates presentation and events rather than changes in accounting principles. 3or e*ample a change in the estimated life of a depreciable asset will affect the comparability of the statements. 9n that case no e*planatory paragraph for lack of consistency is needed but the information may require disclosure in the statements. 3-13 "he three conditions requiring a departure from an unqualified opinion are# $. The scope of the audit has been restricted . ;ne e*ample is when the client will not permit the auditor to confirm material receivables. Another e*ample is when the engagement is not agreed upon until after the client's year/end when it may be impossible to physically observe inventories. The financial statements have not been prepared in accordance ith generally accepted accounting principles . An e*ample is when the client insists upon using replacement costs for fi*ed assets. The auditor is not independent . An e*ample is when the auditor owns stock in the client's business.

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3-14 A !ualified opinion states that there has been either a limitation on the scope of the audit or a departure from <AA( in the financial statements but that the auditor believes that the overall financial statements are fairly presented. "his type of opinion may not be used if the auditor believes the e*ceptions being reported upon are e*tremely material in which case a disclaimer or adverse opinion would be used. An adverse opinion states that the auditor believes the overall financial statements are so materially misstated or misleading that they do not present fairly in accordance with <AA( the financial position results of operations or cash flows.

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3-14 ( ontinued! A disclaimer of opinion states that the auditor has been unable to satisfy him or herself as to whether or not the overall financial statements are fairly presented because of a significant limitation of the scope of the audit or a nonindependent relationship under the Code of Professional Conduct between the auditor and the client. :*amples of situations that are appropriate for each type of opinion are as follows#
"#$%$"% &'#( 0isclaimer ()A*#+( ,$&-A&$"% =aterial physical inventories not observed and the inventory cannot be verified through other procedures. >ack of independence by the auditor. Adverse ?ualified A highly material departure from <AA(. 9nability to confirm the e*istence of an asset which is material but not e*tremely material in value.

3-15 "he common definition of materiality as it applies to accounting and therefore to audit reporting is# A misstatement in the financial statements can be considered material if knowledge of the misstatement would affect a decision of a reasonable user of the statements. 'onditions that affect the auditor's determination of materiality include#

(otential users of the financial statements 0ollar amounts of the following items# net income before ta*es total assets current assets current liabilities and owners' equity 8ature of the potential misstatements5certain misstatements such as fraud are likely to be more important to users of the financial statements than other misstatements.

3-16 =ateriality for lack of independence in audit reporting is easiest to define. 9f the auditor lacks independence as defined by the Code of Professional Conduct it is always considered highly material and therefore a disclaimer of opinion is always necessary. "hat is either the '(A is independent or not independent. 3or failure to follow <AA( there are three levels of materiality# immaterial material and highly material.

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3-17 "he auditor's opinion may be qualified by scope limitations caused by client restrictions or by limitations resulting from conditions beyond the client's control. "he former occurs when the client will not for e*ample permit the auditor to confirm material receivables or physically observe inventories. "he latter may occur when the engagement is not agreed upon until after the client's year/end when it may not be possible to physically observe inventories or confirm receivables. A disclaimer of opinion is issued if the scope limitation is so material that the auditor cannot determine if the overall financial statements are fairly presented. 9f the scope limitation is caused by the client's restriction the auditor should be aware that the reason for the restriction might be to deceive the auditor. 3or this reason a disclaimer is more likely for client restrictions than for conditions beyond anyone's control. When there is a scope restriction that results in the failure to verify material but not pervasive accounts a qualified opinion may be issued. "his is more likely when the scope limitation is for conditions beyond the client's control than for restrictions by the client. 3-18 A report with a scope and an opinion qualification is issued when the auditor can neither perform procedures that he or she considers necessary nor satisfy him or herself by using alternative procedures usually due to the e*istence of conditions beyond the client's or the auditor's control but the amount involved in the financial statements is not highly material. An important part of a scope and opinion qualification is that it results from not accumulating sufficient audit evidence either because of the client's request or because of circumstances beyond anyone's control. A report qualified as to opinion only results when the auditor has accumulated sufficient appropriate evidence but has concluded that the financial statements are not correctly stated. "he only circumstance in which an opinion only qualification is appropriate is for material but not highly material departures from <AA(. 3-19 "he three alternative opinions that may be appropriate when the client's financial statements are not in accordance with <AA( are an unqualified opinion qualified as to opinion only and adverse opinion. 0etermining which is appropriate depends entirely upon materiality. An unqualified opinion is appropriate if the <AA( departure is immaterial 6standard unqualified7 or if the auditor agrees with the client's departure from <AA( 6unqualified with e*planatory paragraph7. A qualified opinion is appropriate when the deviation from <AA( is material but not highly material@ the adverse opinion is appropriate when the deviation is highly material. 3-20 "he A9'(A has such strict requirements on audit opinions when the auditor is not independent because it is important that stockholders and other third parties be absolutely assured that the auditor is unbiased throughout the entire engagement. 9f users develop the attitude that auditors are not independent of management the value of the audit function will be greatly reduced if not eliminated. &/-

3-21 When the auditor discovers more than one condition that requires a departure from or a modification of a standard unqualified report the report should be modified for each condition. An e*ception is when one condition neutrali!es the other condition. An e*ample would be when the auditor is not independent and there is also a scope limitation. 9n this situation the lack of independence overshadows the scope limitation. Accordingly the scope limitation should not be mentioned. 3-22 <iven the global nature of the financial markets investors both in the U.). and abroad are frequently making investments in companies that are located all over the world. While many companies located outside the U. ). already prepare financial statements in accordance with 9nternational 3inancial Aeporting )tandards 693A)7 financial statements of U.)./based entities are based on U.). generally accepted accounting principles 0ifferences in the basis of presentation makes the analysis of U.). and non/U.)./based company financial statements difficult. )imilarly differences e*ist in auditing standards issued across the globe so the adoption of 9nternational )tatements on Auditing 69)As7 would mean auditors from around the globe are conducting their audits using the same set of standards. "he embrace of 93A) and 9)As will help investors in their analysis of audited financial statements prepared across the globe. *u.tip.e Choi e Questions /ro0 C#A (1a0inations 6%7 6&7 6%7 b. b. b. 6&7 6+7 6&7 c. c. c. 6&7 6$7 6&7

3-23 a. 3-24 a. 3-25 a.

2is ussion Questions and #ro3.e0s 1'orrectly stated1 implies absolute accuracy whereas the alternative report states that no material misstatements e*ist. "he reference to generally accepted accounting principles specifies rules that were followed in accounting for the transactions to date@ whereas 1the true economic conditions1 does not identify the specific accounting procedures applied. "he opinion paragraph is not intended to be a certification or a guarantee of the accuracy and correctness of the financial statements but rather is intended to be an e*pression of professional 2udgment based upon a reasonable audit of the statements and underlying records. "he name of the '(A firm rather than that of the individual practitioner should appear on the accountant's report because it is the entire firm that accepts responsibility for the report issued.

3-26 a. b.

c.

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3-26 ( ontinued! e. 1;ur audit was performed to detect material misstatements in the financial statements1 is flawed because the purpose of the audit is to determine whether financial statements are fairly stated not to specifically search for material errors and fraud. 9t also fails to recogni!e the audit standards followed by the auditor. 1We conducted our audit in accordance with auditing standards generally accepted in the United )tates of America1 identifies the auditor's responsibilities for conduct of the audit accumulation of evidence and reporting requirements. 9t is a much broader statement than the alternative clause. 9t also implies that if the auditor has conducted the audit in accordance with generally accepted auditing standards but does not uncover certain material errors or fraud the auditor is unlikely to have responsibility for failing to do so. 9tems that need not be included in the auditor's report are# $. %. "hat ;ptima is presenting comparative financial statements. 6Both years' statements will be referred to in the audit report.7 )pecific description of the change in method of accounting for long/term construction contracts need not be included in the report since it is discussed in the footnotes. But the auditor's report must state that there is a change in accounting principles and refer to the footnote. "he fact that normal receivable confirmation procedures were not used should not be disclosed since the auditor was able to satisfy him or herself through alternate audit procedures. "he lawsuit need not be discussed in the report since it has been included in a footnote.

3-27 a.

&. +. b.

"he following deficiencies are in Allison's report# $. %. "he audit report is neither addressed nor dated and it does not contain a title. "he audit report date should be the last day of field work. "he balance sheet is as of a specific date whereas the income statement and the statement of retained earnings are for a period of time. "he scope paragraph should identify the period of time 6usually one year7. "here are comparative statements but the audit report identifies and deals with only the current year's financial statements. An opinion must also be included for the prior period financial statements. "here is no separate introductory paragraph that states the financial statements audited dates and the responsibilities of management and the auditor. &/C

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3-27 ( ontinued! ,. "here is no separate scope paragraph that describes what an audit is. "wo required sentences are completely omitted# 1An audit includes e*amining 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.1 "he audit was made in accordance with auditing standards generally accepted in the "nited States of America rather than generally accepted accounting standards. "he word material is e*cluded from the scope paragraph 6free of material misstatement7. An additional paragraph should be included which describes the dividend restrictions and the refusal of the client to present a statement of cash flows. "he opinion paragraph states that accounting principles were consistent with those used in the prior year. "he opinion paragraph should make no reference to consistency. "he opinion paragraph e*cludes the required phrase 1in all material respects.1 "he opinion paragraph includes the words 1generally accepted auditing standards1 rather than the phrase 1accounting principles generally accepted in the United )tates of America.1 A separate paragraph should be included stating that generally accepted accounting principles were not consistently applied. "he opinion should be qualified rather than being unqualified. ?ualifications are caused by the# 6a7 failure to present a statement of cash flows. 6b7 failure to disclose the dividend restrictions.

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3-28
(a! C"%2$&$"% $. )cope of the audit has been restricted (3! *A&(R$A+$&' +(4(+ Highly material ( ! &'#( "/ R(#"R& 0isclaimer

C"**(%&, Because the client refuses to allow the auditor to e*pand the scope of his audit a disclaimer of opinion is appropriate rather than a qualified as to scope and opinion.

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3-28 ( ontinued! (a! C"%2$&$"%


%. 3ailure to follow <AA(

(3! *A&(R$A+$&' +(4(+


Highly material or material. We need additional information regarding the auditor's preliminary 2udgment about materiality 8ot applicable

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Adverse 6if highly material7 or ?ualified 6if material7

C"**(%&,
"he materiality of twenty percent of net earnings before ta*es would be sufficient for many auditors to require an adverse opinion. "hat materiality question is a matter of auditor 2udgment. >ack of independence by audit personnel on the engagement mandates a disclaimer for lack of independence. "he company has made a decision to follow a different financing method which is adequately disclosed. "here is no change of accounting principle. "he auditor cannot issue an unqualified opinion on the income statement or the statement of cash flows because a disclaimer of opinion is necessary for the beginning balance sheet. "he auditor may issue an unqualified opinion on the ending balance sheet and a disclaimer of opinion on the income statement statement of cash flows and the beginning balance sheet. "he auditor is able to satisfy him or herself that with the use of alternative procedures a qualified opinion is not necessary.

&. >ack of independence

0isclaimer

+ 8one

8ot applicable

Unqualified

,. )cope of the audit has been restricted

Highly material

0isclaimer

-. )cope of the audit has been restricted

Highly material

Unqualified

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3-29 (a! C"%2$&$"%


$. )cope of the audit has been restricted

(3! *A&(R$A+$&' +(4(+


Highly material

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6-7 0isclaimer

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"he client has restricted the scope of the audit and the auditor was not able to satisfy him or herself by alternative procedures. Because it was a client restriction rather than a condition beyond the clients control causing the limitation and because the limitation is highly material a disclaimer is appropriate. 9ntroductory paragraph is modified second paragraph is added describing the scope restriction scope paragraph is omitted and opinion paragraph is a disclaimer of opinion.

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8ot applicable

6$7 Unqualified5 "here is no indication standard questioning the ability of the wording business to continue operations. "he auditor does not automatically add an e*planatory paragraph simply because there is a risky business. 6$7 Unqualified5 "he amount is immaterial. "he standard facts are adequately disclosed wording in the footnote. 6+7 ?ualified opinion only 5e*cept for "he standards require the use of a qualified opinion for the failure to include a statement of cash flows. "hird paragraph must be added stating the omission.

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9mmaterial

+. 3ailure to follow <AA(

=aterial

,. )ubstantial doubt about going concern

=aterial

6%7 Unqualified5 "here is a question about the e*planatory ability of the company to paragraph continue as a going concern. "he auditor therefore must issue an unqualified report with an e*planatory paragraph following the opinion.

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3-29 ( ontinued! (a! C"%2$&$"%


-. Aeport involving other auditors

(3! *A&(R$A+$&' +(4(+


=aterial

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6&7 Unqualified5 "his is a shared audit report in modified which the auditor will identify wording the portion of work done by the other auditor in the introductory paragraph and still issue an unqualified opinion. "he absolute dollar amounts of assets and revenues or percentages must be stated in the introductory paragraph. 9ntroductory paragraph scope paragraph and opinion paragraph are all modified.

3-30 (a! C"%2$&$"% $. 3ailure to follow <AA(. (3! *A&(R$A+$&' +(4(+ Highly material or material depending upon the amount of the loss and the auditor's preliminary 2udgment about materiality ( ! &'#( "/ R(#"R& 6.7 Adverse 6if highly material7 or 6+7 ?ualified opinion only 5 e*cept for 6if material7 6$7 Unqualified5 standard wording 6-7 0isclaimer 6if highly material7 or 6,7 ?ualified scope and opinion 6if material7

C"**(%& 0isclosure of this information is required in a footnote. 3ailure to do so is a violation of <AA( and is likely to result in a qualified opinion or it could be so material that it requires an adverse opinion. "he amount is immaterial.

%. 3ailure to 9mmaterial follow <AA(. &. )cope of the audit has been restricted. Highly material or material depending upon the auditors preliminary 2udgment about materiality.

Because the auditor was unable to satisfy himself about beginning inventories it would be necessary to issue either a qualified or disclaimer of opinion on the income statement and statement of cash flows as well as the beginning balance sheet. "he use of a qualified or disclaimer would depend upon materiality. An unqualified opinion could be issued for the current period balance sheet.

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3-30 ( ontinued! (a! C"%2$&$"% +. )cope of the audit has been restricted. (3! *A&(R$A+$&' +(4(+ Highly material ( ! &'#( "/ R(#"R& 6-7 0isclaimer

C"**(%& 3ailure of the client to allow the auditor to inspect the minutes book would be a material client/imposed restriction. 0ue to the importance of the minutes book a disclaimer would be necessary. "he certified copy of all resolutions and actions would not be a satisfactory alternative procedure. Because the auditor was able to obtain alternative evidence no scope qualification is necessary. 9f there were such a qualification it would be a qualified scope and opinion or a disclaimer depending on materiality. Aetail Auto (arts has used a replacement cost inventory rather than lower of cost or market. 9t is not sufficiently material to require an adverse opinion. "he change of estimated life is a change of condition and not a change in accounting principles. "herefore an unqualified opinion is appropriate since there is adequate disclosure.

,. )cope of the audit has been restricted.

8ot applicable

6$7 Unqualified5 standard wording

-. 3ailure to follow <AA(.

=aterial

6+7 ?ualified opinion only5 e*cept for

.. 8one

8ot applicable

6$7 Unqualified5 standard wording

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3-31
,8"-+2 A-2$&"R;, R(#"R& <( *"2$/$(2=

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An error correction not involving an accounting principle. An accounting change involving a correction of an error in principle which is accounted for as a correction of an error. An accounting change involving a change in the reporting entity which is a special type of change in accounting principles. An accounting change involving both a change in accounting principle and a change in accounting estimate. Although the effect of the change in each may be inseparable and the accounting for such a change is the same as that for a change in estimate only an accounting principle is involved. An accounting change involving a change from one generally accepted accounting principle to another generally accepted accounting principle. An accounting change involving a change in an accounting estimate. 8ot an accounting change but rather a change in classification. An accounting change from one generally accepted accounting principle to another generally accepted accounting principle.

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8o 8o

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3-32 0eficiencies in the staff accountant's tentative report include the following# $. %. &. Aeport title must include the word Findependent.G "he report should generally be addressed to the board of directors or stockholders not to the audit committee. "he introductory paragraph should state 1we have audited 1 not 1we have e*amined.1

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3-32 ( ontinued! +. When the principal auditor decides to make reference to the audit of another auditor the report should indicate clearly in the introductory paragraph the division of responsibility regarding the portions of the financial statements audited by each. Also the opinion paragraph should state that the opinion is based in part on the reports of other auditors. 8either of these was done. When the principal auditor decides to make reference to the audit of the other auditor the report should disclose the dollar amounts or percentages of the portion of the financial statements audited by the other auditor. "his was not done. "he second paragraph is an inappropriately worded scope paragraph. 9t should be stated as follows# We conducted our audits in accordance with auditing standards generally accepted in the United )tates of America. "hose 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 e*amining 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 and the report of other auditors provide a reasonable basis for our opinion. .. Although the introductory paragraph referred to an audit of the financial statements for the years ended 0ecember &$ %44D and %44C an opinion was e*pressed only on the %44D financial statements. "he statement of cash flows was not identified in the opinion paragraph and financial statements were not referred to in the opinion paragraph as 1consolidated.1 "he e*planatory sentence for consistency should follow the opinion paragraph not precede it. Also the second sentence in the third paragraph should be omitted. "here is no inclusion of the phrase 1in all material respects1 in the opinion paragraph.

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C. D. $4.

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3-33 "he table presented below describes the seven distinct parts of the standard unqualified report and describes both similarities 6part a.7 and differences 6part of b.7 between the standard audit report and the audit report on the >es =eridian 9nc. financial statements.
a: 2es ription o> ,i0i.ar (.e0ents in the +es *eridian Auditor?s Report "he report is titled F9ndependent Auditors Aeport.

,even 2istin t #arts o> ,tandard Audit Report $. Report title Auditing standards require that the report be titled and that the title includes the word independent.

3: 2i>>erent (.e0ents in +es *eridian Auditor?s Report

%. Audit report address "he report is usually addressed to the company its stockholders or the board of directors. &. Introductory paragraph "he first paragraph of the report does three things# first it makes the simple statement that the '(A firm has done an audit. )econd it lists the financial statements that were audited including the balance sheet dates and the accounting periods for the income statement and statement of cash flows. "hird it states that the statements are the responsibility of management and that the auditor's responsibility is to e*press an opinion on the statements based on an audit.

"he report is addressed to the )hareholders of >es =eridian 9nc.

"he report begins with the statement that the '(A firm has done an audit. "he introductory para/ graph lists the financial statements audited including the time period of those statements. "he second paragraph states that management is responsible for the preparation and fair presentation of the financial statements. "he third paragraph describes the auditors responsibility to e*press an opinion the financial statements.

"he introductory paragraph also references the summary of significant accounting principles and other e*planatory reports as being a part of the scope of the audit. A similar reference is not included in the U.). standard audit report. "he discussion of manage/ ments responsibility for the financial statements contained in the second paragraph is more e*tensive than the discussion in the standard audit report. 9t specifically notes that the financial statements are prepared in accordance with 93A) and it describes managements responsibility for internal control application of accounting principles and making estimates.

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3-33 ( ontinued!
a: 2es ription o> ,i0i.ar (.e0ents in the +es *eridian Auditor?s Report "he third paragraph identifies the auditing standards used to conduct the audit similar to the standard audit report. >ike the standard audit report the third paragraph notes that the auditor obtains reasonable assurance about whether the financial statements are free of material misstatements. "he fourth paragraph also contains information related to other elements in the scope paragraph in the standard audit report. 3or e*ample the fourth paragraph describes the auditors evaluation of accounting principlesH policies used estimates made and the overall presentation similar to the scope paragraph in the standard audit report. "he fifth paragraph acknowledges that the auditor believes the evidence obtained provides a sufficient basis for the opinion similar to the last sentence of the scope paragraph of the standard audit report.

,even 2istin t #arts o> ,tandard Audit Report +. Scope paragraph. "he scope paragraph is a factual statement about what the auditor did in the audit. "he remainder briefly describes important aspects of an audit.

3: 2i>>erent (.e0ents in +es *eridian Auditor?s Report "he third paragraph notes that the auditor conducted the audit in accordance with 9)As rather than U.). <AA). "he third paragraph notes that the auditor is required to comply with ethical requirements.

"he fourth paragraph contains more information than the standard audit report about the auditors need to make 2udgments the auditors consideration of risks and internal control and the fact that the risk and control assessments are not sufficient to e*press an opinion on internal control. "he fourth paragraph also e*plicitly notes that risks of material misstatements due to error or fraud are considered.

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3-33 ( ontinued!
a: 2es ription o> ,i0i.ar (.e0ents in the +es *eridian Auditor?s Report "he last paragraph includes the auditors opinion about the financial statements and acknowledges the accounting principles used as the basis of presentation.

,even 2istin t #arts o> ,tandard Audit Report ,. Opinion paragraph. "he final paragraph in the standard report states the auditor's conclusions based on the results of the audit.

3: 2i>>erent (.e0ents in +es *eridian Auditor?s Report "he wording associated with the opinion notes that the auditors opinion is about the Ftrue and fair viewG of the financial statements rather than the financial statements Fpresent fairlyG as stated in the standard audit report.

-. Name of CPA firm. "he name identifies the '(A firm or practitioner who performed the audit. .. Audit report date. "he appropriate date for the report is the end of fieldwork when the auditor has gathered sufficient appropriate evidence to support the opinion.

"he name of the '(A is included.

"he date that the audit is completed is provided below the firms signature.

$nternet #ro3.e0 ,o.ution@ Resear h Annua. Reports

3-1 "he U.). )ecurities and :*change 'ommission 6):'7 makes available in electronic form via the 9nternet most of the forms and reports it receives from publicly traded companies through :0<AA. "his problem e*plores information available on the ):'s Web site. $. "he :0<AA Web site describes many ):'/required forms. 3ind and describe the following ):' forms# Answer@ 3orm C/I / "his is the form that must be filed whenever a registrant encounters a significant event 6e.g. a change in control of ownership disposition or acquisition of a significant

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amount of assets filing for bankruptcy change in independent auditors7.

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$nternet #ro3.e0 3-1 ( ontinued!

3orm $4/I / "his is the annual report that most reporting companies file with the 'ommission. 9t provides a comprehensive overview of the registrant's business. "he report must be filed within -4/D4 days after the end of the company's fiscal year. "his form is required by the )ecurities :*change Act of $D&+. 3orm $4/I)B / "his is the annual report filed by reporting 1small business issuers.1 9t provides a comprehensive overview of the company's business although its requirements call for slightly less detailed information than required by 3orm $4/I. "he report must be filed within D4 days after the end of the company's fiscal year.

%. )earch :0<AA for the $4/I filings of the three companies listed below. Within the $4/I filings locate the independent auditor's report and identify what type of opinion it is 6e.g. unqualified qualified disclaimer adverse7 and what type of e*planatory paragraph if any the opinion contains 6e.g. consistency going concern emphasis7. 6Hint# Eou may be able to search the companys $4/I by using the 9nternet browser's 13ind1 command typically located in the 1:dit1 menu.7 Answer@ American Airlines 9nc. 6$4/I filed %/%4/%44C7 / -nAua.i>ied audit report with an e1p.anatorB paraCraph due to a hanCe in a ountinC prin ip.e Report o> $ndependent ReCistered #u3.i A "he Board of 0irectors and )tockholder American Airlines 9nc. We have audited the accompanying consolidated balance sheets of American Airlines 9nc. as of 0ecember &$ %44. and %44- and the related consolidated statements of operations stockholders equity 6deficit7 and cash flows for each of the three years in the period ended 0ecember &$ %44.. ;ur audits also included the financial statement schedule listed in the 9nde* at 9tem $,6a76%7. "hese consolidated financial statements and schedule are the responsibility of the 'ompanys management. ;ur responsibility is to e*press an opinion on these financial statements and schedule based on our audits. ountinC /ir0

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$nternet #ro3.e0 3-1 ( ontinued! We conducted our audits in accordance with the standards of the (ublic 'ompany Accounting ;versight Board 6United )tates7. "hose standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes e*amining on a test basis evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 9n our opinion the financial statements referred to above present fairly in all material respects the consolidated financial position of American Airlines 9nc. at 0ecember &$ %44. and %44- and the consolidated results of their operations and their cash flows for each of the three years in the period ended 0ecember &$ %44. in conformity with U.). generally accepted accounting principles. Also in our opinion the related financial statement schedule when considered in relation to the basic financial statements taken as a whole present fairly in all material respects the information set forth therein. As discussed in 8otes D and $4 to the consolidated financial statements in %44- the 'ompany changed its method of accounting for share/based compensation as required by )tatement of 3inancial Accounting )tandards 8o. $%&6A7 F)hare/Based (aymentG and changed its method of accounting for retirement benefits as required by )tatement of 3inancial Accounting )tandards 8o. $,C F:mployers Accounting for 0efined Benefit (ension and ;ther (ostretirement (lans.G We also have audited in accordance with the standards of the (ublic 'ompany Accounting ;versight Board 6United )tates7 American Airlines 9nc.s internal control over financial reporting as of 0ecember &$ %44. based on criteria established in 9nternal 'ontrol59ntegrated 3ramework issued by the 'ommittee of )ponsoring ;rgani!ations of the "readway 'ommission and our report dated 3ebruary %4 %44C e*pressed an unqualified opinion thereon. HsH :rnst J Eoung >>( 0allas "e*as 3ebruary %4 %44C

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3ord =otor 'ompany 6$4/I filed %/%./%44C7 / -nAua.i>ied o03ined audit report on the >inan ia. state0ents and interna. ontro. over >inan ia. reportinC with an e1p.anatorB paraCraph due to a hanCe in a ountinC prin ip.e (%ote@ the report is not in the standard 3 paraCraph >or0at! ountinC /ir0

Report o> $ndependent ReCistered #u3.i A "o the Board of 0irectors and )tockholders 3ord =otor 'ompany#

9n our opinion the consolidated financial statements listed in the inde* appearing under 9tem $,6a76$7 present fairly in all material respects the financial position of 3ord =otor 'ompany and its subsidiaries at 0ecember &$ %44. and 0ecember &$ %44- and the results of their operations and their cash flows for each of the three years in the period ended 0ecember &$ %44. in conformity with accounting principles generally accepted in the United )tates of America. 9n addition in our opinion the financial statement schedule listed in the inde* appearing under 9tem $,6a76%7 presents fairly in all material respects the information set forth therein when read in con2unction with the related consolidated financial statements. Also in our opinion the 'ompany maintained in all material respects effective internal control over financial reporting as of 0ecember &$ %44. based on criteria established in Internal Control # Integrated $rame or% issued by the 'ommittee of )ponsoring ;rgani!ations of the "readway 'ommission 6';);7. "he 'ompany's management is responsible for these financial statements and financial statement schedule for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in =anagement's Aeport on 9nternal 'ontrol ;ver 3inancial Aeporting appearing under 9tem DA. ;ur responsibility is to e*press opinions on these financial statements on the financial statement schedule and on the 'ompany's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the (ublic 'ompany Accounting ;versight Board 6United )tates7. "hose standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. ;ur audits of the financial statements included e*amining on a test basis evidence supporting the amounts and disclosures in the financial statements assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. ;ur audit of internal control over financial reporting included obtaining

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$nternet #ro3.e0 3-1 ( ontinued! an understanding of internal control over financial reporting assessing the risk that a material weakness e*ists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. ;ur audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. ;ur audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. "he accompanying sector balance sheets and the related sector statements of income and of cash flows are presented for purposes of additional analysis and are not a required part of the basic financial statements. )uch information has been sub2ected to the auditing procedures applied in the audit of the basic financial statements and in our opinion are fairly stated in all material respects in relation to the basic financial statements taken as a whole. As discussed in 8ote $D to the consolidated financial statements the 'ompany changed the manner in which it accounts for uncertain ta* positions in %44.. As discussed in 8ote %+ the 'ompany changed the manner in which it accounts for defined benefit pension and other postretirement plans and as discussed in 8ote % the 'ompany changed the timing of its annual goodwill and other intangible assets impairment testing and its amorti!ation method for special tools in %44-. As discussed in 8ote %C the 'ompany changed the manner in which it accounts for conditional asset retirement obligations in %44,. A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for e*ternal purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that 6i7 pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company@ 6ii7 provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and e*penditures of the company are being made only in accordance with authori!ations of management and directors of the company@ and 6iii7 provide reasonable assurance regarding prevention or timely detection of unauthori!ed acquisition use or disposition of the companys assets that could have a material effect on the financial statements.

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$nternet #ro3.e0 3-1 ( ontinued! Because of its inherent limitations internal control over financial reporting may not prevent or detect misstatements. Also pro2ections of any evaluation of effectiveness to future periods are sub2ect to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. HsH (ricewaterhouse'oopers >>( (ricewaterhouse'oopers >>( 0etroit =ichigan 3ebruary %. %44C

"he Home 0epot 6$4/I filed +/&/%44C7 K Co03ined -nAua.i>ied audit report on the >inan ia. state0ents and interna. ontro. over >inan ia. reportinC ountinC /ir0

Report o> $ndependent ReCistered #u3.i A "he Board of 0irectors and )tockholders "he Home 0epot 9nc.#

We have audited "he Home 0epot 9nc.'s internal control over financial reporting as of 3ebruary & %44C based on criteria established in Internal Control & Integrated $rame or% issued by the 'ommittee of )ponsoring ;rgani!ations of the "readway 'ommission 6';);7. "he Home 0epot 9nc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying =anagement's Aeport on 9nternal 'ontrol ;ver 3inancial Aeporting. ;ur responsibility is to e*press an opinion on the 'ompany's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the (ublic 'ompany Accounting ;versight Board 6United )tates7. "hose standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. ;ur audit included obtaining an understanding of internal control over financial reporting assessing the risk that a material weakness e*ists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. ;ur audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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$nternet #ro3.e0 3-1 ( ontinued! A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for e*ternal purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that 6$7 pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company@ 6%7 provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and e*penditures of the company are being made only in accordance with authori!ations of management and directors of the company@ and 6&7 provide reasonable assurance regarding prevention or timely detection of unauthori!ed acquisition use or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations internal control over financial reporting may not prevent or detect misstatements. Also pro2ections of any evaluation of effectiveness to future periods are sub2ect to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. 9n our opinion "he Home 0epot 9nc. maintained in all material respects effective internal control over financial reporting as of 3ebruary & %44C based on criteria established in Internal Control & Integrated $rame or% issued by the 'ommittee of )ponsoring ;rgani!ations of the "readway 'ommission. We also have audited in accordance with the standards of the (ublic 'ompany Accounting ;versight Board 6United )tates7 the 'onsolidated Balance )heets of "he Home 0epot 9nc. and subsidiaries as of 3ebruary & %44C and Lanuary %C %44. and the related 'onsolidated )tatements of :arnings )tockholders' :quity and 'omprehensive 9ncome and 'ash 3lows for each of the fiscal years in the three/year period ended 3ebruary & %44C and our report dated =arch %C %44C e*pressed an unqualified opinion on those consolidated financial statements. I(=< >>( Atlanta <eorgia =arch %C %44C
6%ote# 9nternet problems address current issues using 9nternet sources. Because 9nternet sites are sub2ect to change 9nternet problems and solutions may change. 'urrent information on 9nternet problems is available at www.pearsonhighered.comHarens7.

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