-1-

Standard Unqualified report

Independent auditor's report
1) Title
- independent
To the stockholders of ABC company 2) Addressee
- group that hires auditor generally not management
We have audited the accompanying balance sheet
of ABC corporation as of December 31, 19x4, and
the related statement of income, retained earnings
and cash flows for the year then ended. These
financial statements are the responsibility of the
company's management. Our responsibility is to
express an opinion on these statements based on our
audit.
3) Introductory paragraph
- we have audited
- list financial statements
- indicated management's responsibility
- indicated auditor's responsibility
We conducted our audit in accordance with
generally accepted auditing standards. 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
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 audit provides a
reasonable basis for our opinion.
4) Scope paragraph
- GAAP
- reasonable assurance statements are free of material
misstatement
- examining on a test basis evidence supporting
amounts and disclosures
- assessing accounting principles used and significant
estimates made, as well as evaluating overall
presentation
- audit provides a reasonable basis for our opinion
In our opinion, the financial statements referred to
above present fairly, in all material respects, the
financial position of ABC corporation as of
December 31, 19x4, and the results of its operations
and its cash flows for the year then ended in
conformity with generally accepted accounting
principles.
5) opinion paragraph
- in our opinion
- present fairly, in all material respects
- in conformity with generally accepted accounting
anderson and zinder, p.c., cpas 6) signature
- firm
march 5, 19x5 7) date
- end of fieldwork





-2-

Unqualified report modifications (1)(Shared report) Reports involving other auditor
Introductory paragraph
... We did not audit the financial statements of ABC company a wholly owned
subsidiary, which statements reflect total assets of 2,500,000 as of December 31,
19x4 and total revenues of 6,500,000 for the year then ended. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for ABC company, is based
solely on the report of the other auditors.
add 2 sentences at end of paragraph
- did not audit entity (name)
- dollar amounts (absolute or percent)
- audited by other auditors
- our opinion is based on report of other
auditor
Scope paragraph
... We believe that our audit and the report of other auditors provide a reasonable
basis for our opinion.
modify last sentence of paragraph
- our audit and report of other auditors
provide reasonable basis
opinion paragraph
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above ...
modify first sentence of paragraph
- our opinion is based on our audit and
report of other auditors
Unqualified report modifications (2) Substantial doubt about going concern
Explanatory paragraph
the accompanying financial statements have been prepared assuming that ABC
company will continue as a going concern. as discussed in note y to the financial
statements, ABC company has suffered recurring losses from operations and has net
capital deficiency that raises substantial doubt about the company's ability to continue
as a going concern. Managements plans in regard to these matters are also describe
in note y. the financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
add an explanatory paragraph after opinion
- financial statements prepared assuming
going concern
- circumstances have risen that raise
substantial doubt about going concern
- refer to management footnote
- financial statements do not include
adjustments
Note: this explanatory paragraph is used if the auditor believes the audit client will not continue for at least one more year. the
auditor can also issue a disclaimer.
Unqualified report modifications (3) Lack of consistent application of generally accepted accounting principles
explanatory paragraph
as discussed in note v to the financial statements, the company changed its method of
computing depreciation in 19x1.
add a one sentence explanatory paragraph
after opinion
- refer to management footnote
- note item
Unqualified report modifications (4) Change in previously issued opinion
Explanatory paragraph
In our report dated march 1, 19x4, we expressed an opinion that the 19x3 financial
statements did not fairly present financial position, results of operations, and cash
flows in conformity with generally accepted accounting principles because of a
departure from such principles. The company carried its property, plant, and
equipment at appraisal values, and provided for depreciation on the basis of such
values. As described in note x, has changed its method of accounting for these items
and restated its 19x3 financial statements to conform with generally accepted
accounting principles. Accordingly, our present opinion on the 19x3 financial
statements, as presented herein, is different form the expressed in our previous report.
add an explanatory paragraph before
opinion
- date of report
- opinion expressed
- circumstances causing change in opinion
- updated opinion different
-3-

Unqualified report modifications (5) Predecessor auditor's report not presented
Introductory paragraph
We have audited the balance sheet of ABC Company as of December 31, 20X2,
and the related statements of income, retained earnings, and cash flows for the year
then ended. 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 audit. The financial statements of ABC Company as of
December 31, 20X1, were audited by other auditors whose report dated March
31, 20X2, expressed an unqualified opinion on those statements.
[Same second paragraph as the standard report]
In our opinion, the 20X2 financial statements referred to above present fairly,
in all material respects, the financial position of ABC Company as of December 31,
20X2, 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.

Add sentence to end of introductory
paragraph
- last years statements audited by other
auditors
- date of report
- opinion expressed


Modify first sentence of opinion
paragraph
-the 20X2 financial statements.
Unqualified report modifications (6) Emphasis of a matter
Explanatory paragraph
as discussed in note x to the financial statements, the company has had numerous
dealings with businesses controlled by, and people who are related to, the officers of
the company.
add an explanatory paragraph after opinion
- refer to management footnote
- note item
Unqualified report modifications (7) U.S only (Rule 203)
Auditor agrees with a departure from promulgated accounting principle
explanatory paragraph
as described in note q, in may 19xx, the company exchanged shares of its common
stock for $5,060,000 of its outstanding public debt. the fair value of the common
stock issued exceeded the carrying amount of the debt by $466,000, which has been
shown as an extraordinary loss in the 1987 statement of operations. because a
portion of the debt exchanged was convertible debt, a literal application of statement
of financial accounting standards no. 84"induced conversions of convertible debt,"
would have resulted in a further reduction in net income of $3,611,000, which
would have been offset by a corresponding $3,611,000 credit to additional paid in
capital; accordingly, there would have been no net effect on stockholders'
investment. in the opinion of company management, with which we agree, a literal
application of accounting literature would have resulted in misleading financial
statements that do not properly portray the economic consequences of the exchange.
add an explanatory paragraph before or
after opinion
- refer to management footnote
- discuss non-GAAP item
- management believes and we concur that
literal application would result in misleading
financial statements






-4-

Qualified reports
Qualified (1)-- scope limitation
Scope paragraph
except as discussed in the following paragraph, ...
modify first sentence of scope paragraph
- except
Explanatory paragraph
we were unable to obtain audited financial statements supporting the company's
investment in a foreign affiliate stated at $250,000 at December 31, 19x4 or its
equity in earnings of that affiliate of $650,000, which is included in net income for
the year then ended as described in note x to the financial statements; nor were we
able to satisfy ourselves as the carrying value of the investment in the foreign
affiliate or equity in its earnings by other auditing procedures.
add explanatory paragraph before
opinion paragraph
- we were unable to audit
- note scope limitation
- nor were we able to satisfy ourselves by
other procedures
Opinion paragraph
in our opinion, except for the effects of such adjustments, if any, as might have been
determined to be necessary had we been able to obtain evidence regarding the
foreign affiliate investment and earnings, ...
modify first section of opinion paragraph
- except for the effects of such adjustments,
if any
- had we been able to obtain evidence
- note scope limitation
Qualified (2) departure from GAAP
Explanatory paragraph
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 with generally accepted accounting principles. If these lease obligations
were capitalized, property would be increased by $300,000, long term debt by
$250,000, and retained earnings by $50,000 as of December 31, 19x4. Additionally,
net income would be increased by $50,000 and earnings per share would be
decreased by $0.50 for the year then ended.
add explanatory paragraph before
opinion paragraph
- note non-GAAP item
- provide amounts if reasonable possible
opinion paragraph
in our opinion, except for the effects of not capitalizing certain lease obligations, as
discussed in the preceding paragraph, ...
modify first section of opinion paragraph
- except for the effects of not
- note non-GAAP item













-5-

Disclaimer reports
Introductory paragraph
we were engaged to audit ...
modify first sentence of introductory
paragraph
- we were engaged
- delete last sentence on auditor's
responsibility
scope paragraph delete scope paragraph
Explanatory paragraph
we did not observe the taking of the physical inventory as of December 31, 19x4 or
19x3, since those dates were prior to our appointment as auditors for the company,
and we were unable to satisfy ourselves regarding inventory quantities by means of
other auditing procedures. the December 31, 19x4 and 19x3 inventory amounts
enter into the determination of net income and cash flows for the year ended
December 31, 19x4.
add explanatory paragraph before the
opinion paragraph
- we were unable to audit
- note scope limitation
- nor were we able to satisfy ourselves by
other procedures
Opinion paragraph
since the company did not take physical inventories and we were unable to apply
other auditing procedures to satisfy ourselves as to inventory quantities, the scope of
our work was not sufficient to enable us to express, and we do not express, an
opinion on these financial statements.
modify the opinion paragraph
- since we were unable to satisfy ourselves
regarding
- the scope was not sufficient
- we do not express an opinion
Adverse report
Adverse departure from GAAP
Explanatory paragraph
as discussed in note x to the financial statements, the company carries its property,
plant, and equipment accounts at appraisal values, and provides depreciation on the
basis of such values. Generally accepted accounting principles require that property,
plant, and equipment be stated at an amount not in excess of cost, reduced by
depreciation based on such amount. because of this departure, as of December 31,
19x4 inventories have been increased by $450,000 by inclusion in manufacturing
overhead of depreciation in excess of that based on cost; property, plant, and
equipment, less accumulated depreciation is carried at $12,500,000 in excess of an
amount based on cost; resulting on an increase in retained earnings of $450,000 and
appraisal surplus of $12,500,000. for the year ended December 31, 19x4 cost of
goods sold has been increased by $350,000 because of the effects of the
depreciation accounting referred to above, resulting in an decrease in net income of
$117,000.
add explanatory paragraph before
opinion paragraph
- note non-GAAP item
- provide amounts if reasonably possible
Opinion paragraph
In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the financial statements referred to above do not present fairly, in all
material respects, the financial position of ABC corporation as of December 31,
19x4, and the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
modify front end of opinion paragraph
- because of the effects of the non-GAAP
item
- the financial statements do not present
fairly
-6-


Opinion Type Introductory Scope Opinion Explanatory

Unqualified-standard 1 2 3 X

Unqualified with explanatory paragraph
or modified wording


(Shared report) Reports involving other auditors
1
(modified)
2
(modified)
3
(modified)
X

Substantial doubt about going concern 1 2 3 4

Lack of consistent application of generally
accepted accounting principles
1

2

3

4



Change in previously issued opinion

1


2


4


3


Predecessor auditor's report not presented
1
(modified)
2

3
(modified)
X


Emphasis of a matter 1 2 3 4
Auditor agrees with a departure from
promulgated accounting principles
(Rule203 -U.S only)
1


2


4
3
3
4
Qualified (1)-
Scope limitation
1

2
(modified)
4
(modified)
3

Qualified (2)-
Departure from GAAP
1

2

4
(modified)
3

Disclaimer

1
(modified)
X

3
(modified)
2

Adverse
1

2
4
(modified) 3








-7-

1. The auditor's responsibility section of the standard unqualified audit report states that the audit is designed
to:
A) discover all errors and/or irregularities.
B) discover material errors and/or irregularities.
C) conform to generally accepted accounting principles.
D) obtain reasonable assurance whether the statements are free of material misstatement.

2. Which of the following statement is true?
A) The phrase "auditing standards generally accepted in the United States of America" can be found in the
opinion paragraph of a standard, unqualified audit report for a non-public company.
B) In the scope paragraph of the audit report issued for financial statements of a non-public company, the
auditor expresses an opinion about the internal controls of the company.
C) The phrase "generally accepted accounting principles" can be found in the opinion paragraph of a
standard unqualified report.
D) The introductory paragraph of the auditor's report states that the auditor is responsible for the preparation,
presentation and opinion on financial statements.

3. Examples of unqualified opinions which contain modified wording (without adding an explanatory
paragraph) include:
A) the use of other auditors.
B) material uncertainties.
C) substantial doubt about the audited company (or the entity) continuing as a going concern.
D) lack of consistent application of GAAP.

4. When a company's financial statements contain a departure from GAAP with which the auditor concurs,
the departure should be explained in:
A) the scope paragraph.
B) an explanatory paragraph that appears before the opinion paragraph.
C) the opinion paragraph.
D) an explanatory paragraph after the opinion paragraph.

5. A company has changed its method of inventory valuation from an unacceptable one to one in conformity
with generally accepted accounting principles. The auditor's report on the financial statements of the year of
the change should include:
A) no reference to consistency.
B) a reference to a prior period adjustment in the opinion paragraph.
C) an explanatory paragraph that justifies the change and explains the impact of the change on reported net
income.
D) an explanatory paragraph explaining the change.

6. Under AICPA auditing standards, the primary auditor issuing the opinion on the financial statements is
called the:
A) component auditor.
-8-

B) principal auditor.
C) group engagement partner.
D) majority auditor.

7. Which of the following requires recognition in the auditor's opinion as to consistency?
A) The correction of an error in the prior year's financial statements resulting from a mathematical mistake
in capitalizing interest.
B) A change in the estimate of provisions for warranty costs.
C) The change from the cost method to the equity method of accounting for investments in common stock.
D) A change in depreciation method which has no effect on current year's financial statements but is certain
to affect future years.

8. In which situation would the auditor be choosing between "except for" qualified opinion and an adverse
opinion?
A) The auditor lacks independence.
B) A client-imposed scope limitation
C) A circumstance imposed scope limitation
D) Lack of full disclosure within the footnotes

9. If the auditor lacks independence, a disclaimer of opinion must be issued:
A) if the client requests it.
B) only if it is highly material.
C) only if it is material but not pervasive.
D) in all cases.

10.client has changed their method of valuing inventory from FIFO to LIFO and the change has a material
effect on the financial statements. If the auditor does not concur with the appropriateness of the change, the
auditor should issue a(n):
A) disclaimer.
B) adverse opinion.
C) unqualified opinion.
D) qualified opinion.







Answer:
DCA DD B
CCDDD

-9-

Problem_1
The auditors report that follows was drafted by a staff accountant of smith &Co.CPAs,at the completion of the audit
of the financial statements of Lenses Co.(a public company) for the year ended December 31,20X1.


RequiredIdentify deviations from the public company standard report.




-10-

SOLUTON:
The auditors' report contains the following deficiencies:
The title should include the word Independent
The address ordinarily should not be management (it should be the board of directors, or the
shareholders.)
Introductory paragraph
It should begin with We have audited. rather than We have examined..
The final sentence concerning PCAOB requirements should not be included.
Scope paragraph
The audit should be conducted in accordance with Public Company Accounting Oversight Board
standards rather than generally accepted auditing standards.
The auditor obtains reasonable assurance, not positive assurance.
The assurance relates to the financial statements being free of material misstatements not all
misstatements.
Opinion paragraph
The term present should be present fairly.
Applied on a consistent basis at the end of the paragraph is inappropriate and should be deleted.
Internal control paragraph
We also have reviewed at the beginning of the paragraph should be We have audited.

Exercise 1
The following tentative auditors report was drafted by a staff accountant and submitted to a partner in the accounting
firm of Better & Best, CPAs:
AUDIT REPORT
To the Audit Committee of American Broadband, Inc.
We have examined the consolidated balance sheets of American Broadband, Inc. and subsidiaries as of December
31, 2011 and 2010, and the related consolidated statements of income, retained earnings, and cash flows for the years
then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.
Our audits were made in accordance with auditing standards generally accepted in the United States of America as
we considered necessary in the circumstances. Other auditors audited the financial statements of certain subsidiaries
and have furnished us with reports thereon containing no exceptions. Our opinion expressed herein, insofar as it
relates to the amounts included for those subsidiaries, is based solely upon the reports of the other auditors.
As fully discussed in Note 7 to the financial statements, in 2011, the company extended the use of the last-in,
first-out (LIFO) method of accounting to include all inventories. In examining inventories, we engaged Dr. Irwin
Same (Nobel Prize winner 2009) to test check the technical requirements and specifications of certain items of
equipment manufactured by the company.
In our opinion, the financial statements referred to above present fairly the financial position of American
Broadband, Inc. as of December 31, 2011, and the results of operations for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
To be signed by Better & Best, CPAs March 1, 2012
Required
Identify deficiencies in the staff accountants tentative report that constitute departures from the generally accepted
standards of reporting.


-11-

SOLUTON:
Deficiencies in the staff accountant's tentative report include the following:

1. Report title must include the word independent.
2. The report should generally be addressed to the board of directors or stockholders, not to the audit
committee.
3. The introductory paragraph should state, "we have audited," not "we have examined."
4. 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. Neither of these was done.
5. 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. This was not done.
6. The second paragraph is an inappropriately worded scope paragraph. It should be stated as follows:

We conducted our audits in accordance with auditing standards generally accepted in
the United States of America. 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 and the report of other auditors provide a
reasonable basis for our opinion.

7. Although the introductory paragraph referred to an audit of the financial statements for the years
ended December 31, 2011 and 2010, an opinion was expressed only on the 2011 financial
statements.
8. The statement of cash flows was not identified in the opinion paragraph, and financial statements
were not referred to in the opinion paragraph as "consolidated."
9. The explanatory sentence for consistency should follow the opinion paragraph, not precede it. Also,
the second sentence in the third paragraph should be omitted.
10. There is no inclusion of the phrase, "in all material respects" in the opinion paragraph.








-12-

Problem 2(102 )



Situation Appropriate opinion Your reasons
1.
Disclaimer

2.

Unqualified

3.



4.



Qualified
GAAP

5.



Qualified
GAAP








-13-

Problem_3
Several types of opinions are described in a. through h. below. For each opinion, select the appropriate
description of that opinion from the list numbered 1 through 8 below that corresponds with the type of opinion.
Types of Opinion
a. ______ Unqualified opinion with an explanatory paragraph for change in consistency
b. ______ Disclaimer of opinion due to scope limitation
c. ______ Qualied opinion due to inadequate disclosure; report includes a going concern explanatory
paragraph.
d. ______ Shared report with other auditors
e. ______ Standard unqualied (clean) opinion
f. ______ Qualied opinion clue to a scope limitation
g. ______ Adverse opinion for departure from accounting standards
h. ______ Disclaimer of opinion due to lack of independence
Description of Opinions (each item in list can be used only once)
1. One paragraph report containing the words we do not empress an opinion"
2. Three paragraph report with no changes in wording
3. Three paragraph report; the wording in all three paragraphs has been modied
4. Three paragraph report in which the opinion includes we do not express an opinion
5. Four paragraph report in which the explanatory fourth paragraph precedes the opinion; opinion includes
except for the effects of such adjustments, if any, as might have been determined had we been able to
examine
6. Four paragraph report in which the explanatory fourth paragraph precedes the opinion includes nancial
statements do not present fairly
7. Four paragraph report in which the explanatory fourth paragraph follows the opinion
8. Five paragraph report with explanatory paragraphs preceding and following the opinion.














Type of
Opinion
a b c d e f g h
Description
of Opinion
7 4 8 3 2 5 6 1
-14-

Problem4
Audit situations 1 through 8 present various independent factual situations an auditor might encounter in
conducting an audit. List A represents the types of opinions the auditor ordinarily would issue, and List B
represents the report modifications (if any) that would be necessary. For each situation, select one response
from List A and one from List B. Select, as the best answer for each item, the action the auditor normally
would take. Items from either list may be selected once, more than once, or not at all.

Assume the following:
The auditor is independent
The auditor previously expressed an unqualified opinion on the prior-year financial statements unless
otherwise noted
Only single-year (not comparative) statements are presented for the current year (unless otherwise
stated)
The conditions for an unqualified opinion exist unless contradicted in the factual scenario
The conditions stated in the factual scenario are material
No report modifications are to be made except in response to the factual scenario

Factual Scenario
______1. In auditing the Long-Term Investments account, an auditor is unable to obtain audited F/S for an
investee located in a foreign country. The auditor concludes that sufficient competent evidential matter
regarding this investment cannot be obtained but it is not pervasive to the financials as a whole.
______2. Due to recurring operating losses and working capital deficiencies the auditor has substantial
doubt about an entity's ability to continue as a going concern for a reasonable period of time. However, the
F/S disclosures are adequate.
______3. The principal auditor decides to refer to the work of another auditor, who audited a wholly owned
subsidiary of the entity and issued an unqualified opinion.
______4. An entity issues F/S that present financial position and results of operations but omits the related
statement of cash flows. Management discloses in the notes to the F/S that it does not believe the statement
of cash flows to be useful.
______5. An entity changes its depreciation method for production equipment from Straight line to units of
production based on hours of utilization. The auditor concurs with the change, although it has a material
effect on the comparability of the entity's F/S.
______6. An entity is a defendant in a lawsuit alleging infringement of certain patent rights. However,
management cannot reasonably estimate the ultimate outcome of the litigation. The auditor believes that
there is a reasonable possibility of a significant material loss, but the lawsuit is adequately disclosed in the
notes to the F/S.
______7. An entity discloses certain lease obligations in the notes to the F/S. The auditor believes that the
failure to capitalize these leases is a departure from GAAP.
______8. The entity wishes to show comparative F/S and include the prior year. However, the prior year F/S
contained a qualification due to an inappropriate method of GAAP. Accordingly, management corrected the
prior year GAAP deficiency and included the updated numbers in the comparative financials for the current
year.

-15-

List A
Opinion Choices
List B
Report Modification Choices
A. Qualified
H. Describe the circumstances in an explanatory paragraph
preceding the opinion paragraph w/o modifying the three standard
paragraphs.
B. Unqualified
I. Describe the circumstances in the opinion paragraph w/o adding
an explanatory paragraph.
C. Adverse
J. Describe the circumstances in an explanatory paragraph
preceding the opinion paragraph and modify the opinion
paragraph.
D. Disclaimer
K. Describe the circumstances in an explanatory paragraph
following the opinion paragraph and modify the opinion
paragraph.
E. Either Qualified or Adverse
L. Describe the circumstances in an explanatory paragraph
preceding the opinion paragraph and modify the scope & opinion
paragraph.
F. Either Disclaimer or Adverse
M. Describe the circumstances in an explanatory paragraph
following the opinion paragraph and modify the scope & opinion
paragraph.
G. Either Qualified or Disclaimer
N. Describe the circumstances in the scope paragraph w/o adding
an explanatory paragraph.

O. Describe the circumstances in an explanatory paragraph
following the opinion paragraph w/o modifying the three standard
paragraphs.

P. Describe the circumstances in the introductory paragraph w/o
adding an explanatory paragraph.
.
Q. Describe the circumstances in the introductory paragraph w/o
adding an explanatory paragraph, and modify the scope & opinion
paragraphs.
R. Issue the standard auditor's report w/o modification.
S. None of the above.

Answer:
1. A, L 2. B,O 3. B, Q 4. A, J 5. B, O 6. B, O 7. E, J 8. B, H