A1-M5-Modified Opinions Due to Financial Statement Issues.

Qualified Opinion Due to Material Misstatement of Financial Statements: Nonissuer. Basis for Qualified Opinion Paragraph: This paragraph should be placed immediately before the opinion paragraph and use the heading "Basis for Qualified Opinion." This paragraph should include:

(1) A description and quantification of the financial effects of any misstatement that relates to specific amounts in the financial statements. (a). If it is not practicable to quantify the financial effects, this should be stated.

Nature of Material Misstatements. (≠ GAAP) A material misstatement of the financial statements may arise in relation to the following:

(1) The appropriate of accounting policies. (2) The application of accounting policies. (3) The appropriateness of the financial statement presentation or the appropriateness or adequacy of disclosure in the financial statements.

Appropriateness of Financial Statement Presentation or Disclosure (≠ GAAP) Material misstatements related to the appropriateness of financial statement presentation or the appropriateness or adequacy of disclosures may arise when:

(1). The financial statements do not include all required disclosures; (2). The disclosures are not presented in accordance with the applicable financial reporting framework;

Adverse Opinion Due to Material Misstatement of Financial Statements: Nonissuer. Basis for Adverse Opinion Paragraph. This paragraph should be placed immediately before the opinion paragraph and use the heading "Basis for Adverse Opinion." This paragraph should include:

(1).A description and quantification of the financial effects of any misstatement that relates to specific amounts in the financial statements. (a). If it is not practicable to quantify the financial effects, this should be stated.

Adverse Opinion Due to Material Misstatement of Financial Statements: Nonissuer. Basis for Adverse Opinion Paragraph. This paragraph should be placed immediately before the opinion paragraph and use the heading "Basis for Adverse Opinion." This paragraph should include:(3)

(2). An explanation of how disclosures are misstated if there is a material misstatement related to narrative disclosure. (3). A description of the nature of omitted information and inclusion of information, when practicable, if there is an omission that is required to be presented or disclosed.

Qualified Opinion Due to Material Misstatement of Financial Statements: Nonissuer. Basis for Qualified Opinion Paragraph: This paragraph should be placed immediately before the opinion paragraph and use the heading "Basis for Qualified Opinion." This paragraph should include:

(2). An explanation of how disclosures are misstated is there is a material misstatement related to narrative disclosure.

Appropriateness of Accounting Policies (≠ GAAP) Material misstatements related to the appropriateness of accounting policies may arise when: (1). accounting policies are not in accordance with the applicable financial reporting framework;

(2). The financial statements do not represent the underlying transactions and events in a manner that achieves fair presentation; or (3).The entity has not complied with the financial reporting framework requirements for accounting for and disclosing changes in accounting policies.

Qualified Opinion Due to Material Misstatement of Financial Statements: Nonissuer. Basis for Qualified Opinion Paragraph: This paragraph should be placed immediately before the opinion paragraph and use the heading "Basis for Qualified Opinion." This paragraph should include: (3)

(3) A description of the nature of omitted information and inclusion of the omitted information, when practicable, if there is an omission of information that is required to be presented or disclosed.

Appropriateness of Financial Statement Presentation or Disclosure (≠ GAAP) Material misstatements related to the appropriateness of financial statement presentation or the appropriateness or adequacy of disclosures may arise when: (2)

(3). The financial statements do not provide the disclosures needed to achieve fair presentation; or (4). Information that is required to be presented, such as a statement of cash flows, has not been included or disclosed in the financial statements.

Adverse Opinion Due to Material Misstatement of Financial Statements: Nonissuer. Basis for Adverse Opinion Paragraph. This paragraph should be placed immediately before the opinion paragraph and use the heading "Basis for Adverse Opinion." This paragraph should include:(2)

(b). If disclosure of the financial effects is made in the notes to the financial statements, the basis for the modification paragraph can be shortened by referring to the disclosure.

Adverse Opinion (Issuer/public company/GAAP-very material problem). Adverse Opinion Due to Material Misstatement of Financial Statements: Issuer. Middle Paragraph(s):

A paragraph should be placed immediately before the opinion paragraph. This paragraph should include: (1). All of the substantive reasons that lead the auditor to conclude that there has been a departure from generally accepted accounting principles.

Qualified Opinion (issuer/public company/GAAP-material problem.) Qualified Opinion Due to Material Misstatement of Financial Statements:Issuer. Middle Paragraph(s):

A paragraph should be placed immediately before the opinion paragraph. This paragraph should include: (1). All of the substantive reasons that lead the auditor to conclude that there has been a departure from generally accepted accounting principles.

Qualified Opinion vs. Adverse Opinion: A qualified opinion should be expressed when the auditor concludes that misstatements, individually or in the aggregate, are material but not pervasive to the financial statements.

An adverse opinion should be expressed when the auditor concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.

A material change in accounting principle would result in the addition of

An emphasis-of-matter paragraph to the unmodified opinion.

An adverse opinion is issued when the financial statements

Are not presented in accordance with GAAP.

Adverse Opinion Due to Material Misstatement of Financial Statements: Nonissuer. Adverse Opinion Paragraph. When the auditor expresses an adverse opinion, the opinion paragraph should state that, in the auditor's opinion,

BECAUSE Of the significance of the matter(s) described in the basis for adverse opinion paragraph, the financial statements DO NOT PRESENT FAIRLY in accordance with the applicable financial reporting framework.

Adverse Opinion Due to Material Misstatement of Financial Statements: Issuer. Adverse Opinion Paragraph: When the auditor expresses an adverse opinion, the opinion paragraph should state that, in the auditor's opinion,

Because Of the effects of matters discussed in preceding paragraph(s), the financial statements Do Not Present Fairly, in conformity with accounting principles generally accepted in the United States of America, the financial statements.

If a company issues financial statements that purport to present financial position and results of operation

But omits the related statement of cash flows , the auditor will normally conclude that the omission requires qualification of the opinion.

The auditor's inability to determine the amounts associated with illegal acts

Committed by the client's management could result in a disclaimer.

Qualified Opinion Due to Material Misstatement of Financial Statements: Nonissuer. Qualified Opinion Paragraph. When the auditor expresses a qualified opinion due to a material misstatement in the financial statements, the opinion paragraph should state that, in the auditor's opinion,

EXCEPT FOR the effects of the matter(s) described in the basis for qualified opinion paragraph, the financial statements are PRESENTED FAIRLY, in all material respects, in accordance with the applicable financial reporting framework.

Materiality of Problem: Material but not pervasive

Financial Statements Are Materially Misstated (Financial Statement Issues): Qualified opinion. Inability to Obtain Sufficient Appropriate Audit Evidence (Audit Issues): Qualified opinion.

Materiality of Problem: None or immaterial

Financial Statements Are Materially Misstated (Financial Statement Issues): Unmodified (Unqualified). Inability to Obtain Sufficient Appropriate Audit Evidence (Audit Issues): Unmodified (Unqualified).

Materiality of Problem: Material and pervasive

Financial Statements Are Materially Misstated (Financial Statement Issues):Adverse opinion. Inability to Obtain Sufficient Appropriate Audit Evidence (Audit Issues): Disclaimer of opinion.

Practicable means that the information is reasonably obtainable from management's accounts and records and that providing the information in the auditor's report does not require the auditor to assume the position of preparer of financial information.

For example, the auditor is not expected to prepare a basic financial statement, such as an omitted statement of cash flows, or segment information and include it in the auditor's report when management omits such information.

An auditor may express a disclaimer of opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base an opinion.

For example, when an auditor is unable to determine the extent of or the amounts associated with a pervasive employee fraud scheme , there is not sufficient appropriate audit evidence , and an expression of disclaimer of opinion may be appropriate.

Sample Report: Adverse Opinion Due to a Material Misstatement of the Financial Statements (Nonissuer). Basis for Adverse Opinion: Under accounting principles generally accepted in the United States of America, the subsidiary should have been consolidated because it is controlled by the company.

Had XYZ Company been consolidated, many elements in the accompanying consolidated financial statements would have been materially affected. The effects on the consolidated financial statements of the failure to consolidate have not been determined.

The client's refusal to provide access to the minutes of the Board of Director's meeting would result

In a disclaimer of opinion.

Adverse Opinion Due to Material Misstatement of Financial Statements: Nonissuer. Auditor's Responsibility Paragraph.

Modify the paragraph to state: "Auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for the ADVERSE AUDIT OPINION. "

Qualified Opinion Due to Material Misstatement of Financial Statements: Nonissuer. Auditor's Responsibility Paragraph:

Modify the paragraph to state: "Auditor believes that the auditor evidence obtained is sufficient and appropriate to provide a basis for the qualified audit opinion."

The auditor's inability to observe physical inventories

Or apply alternative procedures to verify their balances could result in a disclaimer.

The failure of the financial statements to contain adequate disclosure of related party transactions,

Or other required disclosures , would result in a qualified or adverse opinion , not a disclaimer of opinion.

An auditor may express a disclaimer of opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base an opinion. When management refuses to

Produce documentation verifying the ownership of its equipment and production facilities, a client-imposed scope limitation exists, and an expression of disclaimer of opinion may be appropriate.

Qualified Opinion Due to Material Misstatement of Financial Statements: Nonissuer Introductory Paragraph:

Same as standard nonissuer audit report.

Qualified Opinion Due to Material Misstatement of Financial Statements: Nonissuer. Management's Responsibility Paragraph.

Same as standard nonissuer audit report.

Substantial doubt with regard to the entity's ability to continue as a going concern

Should be disclosed in an emphasis-of-matter paragraph appended to an otherwise unmodified opinion.

If the auditor is unable to observe physical inventory and is unable to become satisfied through alternative means,

That is a scope limitation. Scope limitation results in either a qualified opinion or a disclaimer of opinion.

Sample Report: Qualified Opinion Due to a Material Misstatement of the Financial Statements Issuer (Public Company). Report of Independent Registered Public Accounting Firm.

The company has excluded, from property and debt in the accompanying balance sheets, certain lease obligations that, in our opinion, should be capitalized in order to conform to accounting principles generally accepted in the United States of America.

Sample Report:Qualified Opinion Due to Inadequate Disclosure Nonissuer. Independent Auditor's Report. Basis for Qualified Opinion:

The company's financial statements do not disclose [describe the nature of the omitted information that is not practicable to present in the auditor's report]. In our opinion, disclosure of this information is required by accounting principles generally accepted in the United States of America.

Sample Report:Qualified Opinion Due to Inadequate Disclosure Nonissuer. Independent Auditor's Report. Auditor's Responsibility:

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our QUALIFIED audit opinion.

Sample Report: Adverse Opinion Due to a Material Misstatement of the Financial Statements (Nonissuer). Independent Auditor's Report. Auditor's Responsibility.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our adverse audit opinion.

Sample Report:Qualified Opinion Due to Inadequate Disclosure Nonissuer. Independent Auditor's Report. Qualified Opinion: In our opinion, EXCEPT for the omission of the information described in the Basis for Qualified Opinion paragraph, the financial statements referred to

above PRESENT FAIRLY, in all material respects, the financial position of ABC Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Qualified Opinion (issuer/public company/GAAP-material problem.) Qualified Opinion Due to Material Misstatement of Financial Statements:Issuer. Middle Paragraph(s):(2) (2).Disclosure of the principal effects of the subject matter of the qualification on financial position, results of operations,

and cash flows, if practicable. (a). if the effects are not reasonably determinable, the report should so state. (b). if such disclosures are made in a note to the financial statements, the explanatory paragraph(s) may be shortened by referring to it.

Sample Report: Adverse Opinion Due to a Material Misstatement of the Financial Statements (Nonissuer). Basis for Adverse Opinion: As described in Note X, the Company has not consolidated the financial statements of subsidiary XYZ company that it acquired during 2001

because it has not yet been able to ascertain the fair value of certain of the subsidiary's material assets and liabilities at the acquisition date. This investment is therefore accounted for on a cost basis by the Company.

Sample Report: Qualified Opinion Due to a Material Misstatement of the Financial Statements Issuer (Public Company). Report of Independent Registered Public Accounting Firm. If these lease obligations were capitalized, property would be increased by $______ and $_____ long-term debt

by $_____ and $_____, and retained earnings by $_____ and $______ as of December 31, 2002 and 2001, respectively. Additionally, net income would be increased (decreased) by $____ and $____ and earnings per share would be increased (decreased) by $_____ and $_____, respectively, for years then ended.

Adverse Opinion Due to Material Misstatement of Financial Statements: Issuer. Middle Paragraph(s): A paragraph should be placed immediately before the opinion paragraph. This paragraph should include: (2). Disclosure of the principal effects of the subject matter of the adverse opinion on

financial position, results of operations, and cash flows, if practicable. (a). If the effects are not reasonably determinable, the report should so state. (b). If such disclosures are made in a note to the financial statements, the explanatory paragraph(s) may be shortened by referring to it.

Form and Content of Auditor's Report Nonissuers= Private company When the auditor expresses a qualified or adverse opinion due to material misstatement of the financial statements,the "Auditor's Responsibility" paragraph

is modified and the auditor's report will include a "Basis for Modification" paragraph and a "Qualified Opinion" or "Adverse Opinion" paragraph, as appropriate.

Qualified Opinion Due to Material Misstatement of Financial Statements: Basis for Qualified Opinion: This paragraph should be placed immediately before the opinion paragraph and use the heading "Basis for Qualified Opinion." This paragraph should include: (1) A description and quantification

of the financial effects of any misstatement that relates to specific amounts in the financial statements. (b). If disclosure of the financial effects is made in the notes to the financial statements, the basis for the modification paragraph can be shortened by referring to the disclosure.

If a company issues financial statements that purport to present financial position and results of operations but

omits the related statement of cash flows, the auditor will normally conclude that the omission requires a qualified opinion.

The auditor cannot issue an unmodified report if the client

omits the statement of cash flows from the financial statements.

Sample Report: Qualified Opinion Due to a Material Misstatement of the Financial Statements Issuer (Public Company). In our opinion, Except For the effects of not capitalizing certain lease obligations as discussed in the preceding paragraph,the financial statements

referred to above Present Fairly, in all material respects, the financial position of X Company as of December 31, 2002 and 2001, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Qualified Opinion (issuer/public company/GAAP-material problem.) Qualified Opinion Due to Material Misstatement of Financial Statements:Issuer. Qualified Opinion Paragraph: When the auditor expresses a qualified opinion due to a material misstatement in the financial statements,the opinion paragraph

should state that, in the auditor's opinion, Except For the effects of the matter(s) discussed in the preceding paragraph, the financial statements are Presented Fairly, in all material respects, in conformity with the accounting principles generally accepted in the United States of America.

Application of Accounting Policies (≠ GAAP) Material misstatements related to the application of accounting policies may arise when: (1). Management has not applied accounting policies in accordance with asset);

the applicable financial reporting framework (e.g., expensing rather than capitalizing an (2). Management has not applied accounting policies consistently between periods or to similar transactions and events; or (3). There is an error in the application of an accounting policy.

Qualified Opinion Vs. Adverse Opinion = GAAP Problem.

the auditor uses professional judgement to determine whether to issue a qualified opinion or an adverse opinion when audit evidence indicates that there is material misstatement of the financial statements.

Sample Report: Adverse Opinion Due to a Material Misstatement of the Financial Statements (Nonissuer). Adverse Opinion. In our opinion, Because Of the significance of the matter discussed in the Basis for Adverse Opinion paragraph,

the consolidated financial statements referred to above Do Not Present Fairly the financial position of ABC Company and its subsidiary as of December 31, 2001, or the results of their operations or their cash flows for the year then ended.