Solution Manual for Auditing and Assurance Services, 16th Edition

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1-1
Chapter 1
The Demand for Audit and Other Assurance Services
 Concept Checks
P. 8
1. To do an audit, there must be information in a verifiable form and some
standards (criteria) by which the auditor can evaluate the information.
Determining the degree of correspondence between information and
established criteria is determining whether a given set of information is in
accordance with the established criteria. For an audit of a company’s
financial statements the criteria are U.S. generally accepted accounting
principles or International Financial Reporting Standards.
2. The four primary causes of information risk are remoteness of information,
biases and motives of the provider, voluminous data, and the existence of
complex exchange transactions.
The three main ways to reduce information risk are:
1. User verifies the information.
2. User shares the information risk with management.
3. Audited financial statements are provided.
P. 17
1. The three main types of audits are operational audits, compliance audits, and
financial statement audits. The table below summarizes the purposes and
nature of each type of audit.
OPERATIONAL
AUDITS
COMPLIANCE
AUDITS
AUDITS OF
FINANCIAL
STATEMENTS
PURPOSE To evaluate
whether
operating
procedures are
efficient and
effective
To determine
whether the client is
following specific
procedures set by a
higher authority
To determine
whether the
overall financial
statements are
presented in
accordance with
specified criteria
(usually GAAP)

1-2
Concept Checks (continued)
OPERATIONAL
AUDITS
COMPLIANCE
AUDITS
AUDITS OF
FINANCIAL
STATEMENTS
USERS OF
AUDIT
REPORT
Management of
organization
Authority setting
down procedures,
internal or external
Different groups
for different
purposes — many
outside entities
NATURE Highly
nonstandard;
often subjective
Not standardized,
but specific and
usually objective
Highly
standardized
PERFORMED
BY:
CPAs Frequently Occasionally
Almost
universally
GAO
AUDITORS Frequently Frequently Occasionally
IRS
AUDITORS Never Universally Never
INTERNAL
AUDITORS Frequently Frequently Frequently*
* Internal auditors may assist CPAs in the audit of financial statements. Internal
auditors may also audit internal financial statements for use by management.
2. The major differences in the scope of audit responsibilities for CPAs, GAO
auditors, IRS agents, and internal auditors are:
• CPAs perform audits of financial statements prepared using U.S.
GAAP or IFRS in accordance with auditing standards.
• GAO auditors perform compliance or operational audits in order to
assure the Congress of the expenditure of public funds in accordance
with its directives and the law.
• IRS agents perform compliance audits to enforce the federal tax laws
as defined by Congress, interpreted by the courts, and regulated by the
IRS.
• Internal auditors perform compliance or operational audits in order to
assure management or the board of directors that controls and policies
are properly and consistently developed, applied, and evaluated.

1-3
 Review Questions
1-1 To do an audit, there must be information in a verifiable form and some
standards (criteria) by which the auditor can evaluate the information. The
information for Jones Company's tax return is the federal tax returns filed by the
company. The established criteria are found in the Internal Revenue Code
and all interpretations. For the audit of Jones Company's financial
statements the information is the financial statements being audited and the
established criteria are U.S. GAAP or IFRS.
1-2 This apparent paradox arises from the distinction between the function of
auditing and the function of accounting. The accounting function is the recording,
classifying, and summarizing of economic events to provide relevant information
to decision makers. The rules of accounting are the criteria used by the auditor
for evaluating the presentation of economic events for financial statements and
he or she must therefore have an understanding of accounting standards, as well
as auditing standards. The accountant need not, and frequently does not,
understand what auditors do, unless he or she is involved in doing audits, or has
been trained as an auditor.1-3 An independent audit is a means of satisfying
the need for reliable information on the part of decision makers. Recent changes
in accounting and business operations include:
1. Increased global activities of many businesses
a. Multiple product lines and transaction locations
b. Foreign exchange affects transactions
2. Complex accounting and exchange transactions
a. Increasing use of derivatives and hedging activities
b. Increasingly complex accounting standards in areas such as
revenue recognition
3. More complex information systems
a. Possibly millions of transactions processed daily through on-
line and traditional sales channels
b. Voluminous data requires interpretation
1-4 1. Risk-free interest rate This is approximately the rate the bank could
earn by investing in U.S. treasury notes for the same length of time
as the business loan.
2. Business risk for the customer This risk reflects the possibility that
the business will not be able to repay its loan because of economic
or business conditions such as a recession, poor management
decisions, or unexpected competition in the industry.
3. Information risk This risk reflects the possibility that the information
upon which the business risk decision was made was inaccurate. A
likely cause of the information risk is the possibility of inaccurate
financial statements.
Auditing has no effect on either the risk-free interest rate or business risk.
However, auditing can significantly reduce information risk.

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1-4
1-5 The three main ways to reduce information risk are:
1. User verifies the information.
2. User shares the information risk with management.
3. Audited financial statements are provided.
The advantages and disadvantages of each are as follows:
ADVANTAGES DISADVANTAGES
USER VERIFIES
INFORMATION
1. User obtains information
desired.
2. User can be more confident
of the qualifications and
activities of the person
getting the information.
1. High cost of obtaining
information.
2. Inconvenience to the
person providing the
information because
large number of users
would be on premises.
USER SHARES
INFORMATION
RISK WITH
MANAGEMENT
1. No audit costs incurred. 1. User may not be able
to collect on losses.
AUDITED
FINANCIAL
STATEMENTS
ARE PROVIDED
1. Multiple users obtain the
information.
2. Information risk can usually
be reduced sufficiently to
satisfy users at reasonable
cost.
3. Minimal inconvenience to
management by having
only one auditor.
1. May not meet needs
of certain users.
2. Cost may be higher
than the benefits in
some situations, such
as for a small
company.
1-6 Information risk is the risk that information upon which a business decision is
made is inaccurate. Fair value accounting is often based on estimates and requires
judgment. Fair value can be estimated using multiple methods with some estimates
being more subjective than others. Fair value estimates are made at a point in time,
but can also change rapidly, depending on market conditions. All of these factors
increase information risk.
1-7 An assurance service is an independent professional service to improve the
quality of information for decision makers. An attestation service is a form of
assurance service in which the CPA firm issues a report about the reliability of an
assertion that is the responsibility of another party. Audit services are a form of
attestation service in which the auditor expresses a written conclusion about
the degree of correspondence between information and established criteria.

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1-5
1-7 (continued)
The most common form of audit service is an audit of historical financial
statements, in which the auditor expresses a conclusion as to whether the
financial statements are presented in accordance with an applicable financial
reporting framework such as U.S. GAAP or IFRS. An example of an attestation
service is a report on the effectiveness of an entity’s internal control over financial
reporting. There are many possible forms of assurance services, including services
related to business performance measurement, health care performance, and
information system reliability.
1-8 The primary evidence the internal revenue agent will use in the audit of
the Jones Company's tax return include all available documentation and other
information available in Jones’ office or from other sources. For example, when
the internal revenue agent audits taxable income, a major source of information
will be bank statements, the cash receipts journal and deposit slips. The internal
revenue agent is likely to emphasize unrecorded receipts and revenues. For
expenses, major sources of evidence are likely to be cancelled checks and
electronic funds transfers, vendors' invoices, and other supporting
documentation.
1-9 Five examples of specific operational audits that could be conducted by an
internal auditor in a manufacturing company are:
1. Examine employee time records and personnel records to determine
if sufficient information is available to maximize the effective use of
personnel.
2. Review the processing of sales invoices to determine if it could be
done more efficiently.
3. Review the acquisitions of goods, including costs, to determine if
they are being purchased at the lowest possible cost considering
the quality needed.
4. Review and evaluate the efficiency of the manufacturing process.
5. Review the processing of cash receipts to determine if they are
deposited as quickly as possible.
1-10 When auditing historical financial statements, an auditor must have a
thorough understanding of the client and its environment. This knowledge should
include the client’s regulatory and operating environment, business strategies
and processes, and measurement indicators. This strategic understanding is also
useful in other assurance or consulting engagements. For example, an auditor
who is performing an assurance service on information technology would need to
understand the client’s business strategies and processes related to information
technology, including such things as purchases and sales via the Internet.
Similarly, a practitioner performing a consulting engagement to evaluate the
efficiency and effectiveness of a client’s manufacturing process would likely start
with an analysis of various measurement indicators, including ratio analysis and
benchmarking against key competitors.

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1-6
1-11 The four parts of the Uniform CPA Examination are: Auditing and Attestation,
Financial Accounting and Reporting, Regulation, and Business Environment and
Concepts.
 Multiple Choice Questions From CPA Examinations
1-12 a. (3) b. (2) c. (1)
1-13 a. (2) b. (4) c. (2)
 Multiple Choice Questions From Becker CPA Exam Review
1-14 a. (4) b. (1) c. (3)
 Discussion Questions And Problems
1-15 a. Audit services are a form of attestation service, and attestation
services are a form of assurance service. In a diagram, audit
services are located within the attestation service area, and
attestation services are located within the assurance service area.
b. 1. (2) An attestation service other than an audit service
2. (1) An audit of historical financial statements
3. (3) An assurance or nonassurance service that is not an
attestation service
4. (2) An attestation service other than an audit service
5. (2) An attestation service other than an audit service
6. (2) An attestation service other than an audit service
7. (2) An attestation service other than an audit service
8. (2) An attestation service other than an audit service
9. (2) An attestation service other than an audit service
(Review services are a form of attestation, but are
performed according to Statements on Standards for
Accounting and Review Services.)
10. (2) An attestation service other than an audit service
11. (3) An assurance or nonassurance service that is not an
attestation service
1-16 a. The interest rate for the loan that requires a review report is lower
than the loan that did not require a review because of lower
information risk. A review report provides moderate assurance to
financial statement users, which lowers information risk. An audit
report provides further assurance and lower information risk. As a
result of reduced information risk, the interest rate is lowest for the
loan with the audit report.

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1-7
1-16 (continued)
b. Given these circumstances, Busch should select the loan from First
City Bank that requires an annual audit. In this situation, the
additional cost of the audit is less than the reduction in interest due
to lower information risk. The following is the calculation of total
costs for each loan:
LENDER
CPA
SERVICE
COST OF CPA
SERVICES
ANNUAL
INTEREST
ANNUAL
LOAN COST
Existing loan None 0 $ 360,000 $ 360,000
United National Bank Review $ 35,000 $ 300,000 $ 335,000
First City Bank Audit $ 60,000 $ 240,000 $ 300,000
c. Busch should select the loan from United National Bank due to the
higher cost of the audit and the reduced interest rate for the loan
from United National Bank. The following is the calculation of total
costs for each loan:
LENDER
CPA
SERVICE
COST OF CPA
SERVICES
ANNUAL
INTEREST
ANNUAL
LOAN COST
Existing loan None 0 $ 360,000 $ 360,000
United National Bank Review $ 35,000 $ 270,000 $ 305,000
First City Bank Audit $ 80,000 $ 240,000 $ 320,000
d. Busch may desire to have an audit because of the many other
benefits that an audit provides. The audit will provide Busch’s
management with assurance about annual financial information used
for decision-making purposes. The audit may detect errors or fraud, and
provide management with information about the effectiveness of
controls. In addition, the audit may result in recommendations to
management that will improve efficiency or effectiveness.
e. The auditor must have a thorough understanding of the client and its
environment, including the client’s e-commerce technologies, industry,
regulatory and operating environment, suppliers, customers, creditors,
and business strategies and processes. This thorough analysis helps
the auditor identify risks associated with the client’s strategies that
may affect whether the financial statements are fairly stated. This
strategic knowledge of the client’s business often helps the auditor
identify ways to help the client improve business operations, thereby
providing added value to the audit function.

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1-8
1-17 a. The services provided by Consumers Union are very similar to
assurance services provided by CPA firms. The services provided
by Consumers Union and assurance services provided by CPA
firms are designed to improve the quality of information for decision
makers. CPAs are valued for their independence, and the reports
provided by Consumers Union are valued because Consumers
Union is independent of the products tested.
b. The concepts of information risk for the buyer of an automobile and
for the user of financial statements are essentially the same. They
are both concerned with the problem of unreliable information being
provided. In the case of the auditor, the user is concerned about
unreliable information being provided in the financial statements.
The buyer of an automobile is likely to be concerned about the
manufacturer or dealer providing unreliable information.
c. The four causes of information risk are essentially the same for a
buyer of an automobile and a user of financial statements:
(1) Remoteness of information It is difficult for a user to obtain
much information about either an automobile manufacturer
or the automobile itself without incurring considerable cost.
The automobile buyer does have the advantage of possibly
knowing other users who are satisfied or dissatisfied with a
similar automobile, and the ability to perform online research
of new vehicles.
(2) Biases and motives of provider There is a conflict between
the automobile buyer and the manufacturer. The buyer wants
to buy a high quality product at minimum cost whereas the
seller wants to maximize the selling price and quantity sold.
(3) Voluminous data There is a large amount of available
information about automobiles that users might like to have
in order to evaluate an automobile. Either that information is
not available or too costly to obtain.
(4) Complex exchange transactions The acquisition of an
automobile is expensive and certainly a complex decision
because of all the components that go into making a good
automobile and choosing between a large number of
alternatives.

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1-9
1-17 (continued)
d. The three ways users of financial statements and buyers of
automobiles reduce information risk are also similar:
(1) User verifies information him or herself That can be obtained
by driving different automobiles, examining the specifications of
the automobiles, talking to other users and doing research in
various magazines.
(2) User shares information risk with management The
manufacturer of a product has a responsibility to meet its
warranties and to provide a reasonable product. The buyer
of an automobile can return the automobile for correction of
defects. In some cases a refund may be obtained.
(3) Examine the information prepared by Consumer Reports
This is similar to an audit in the sense that independent
information is provided by an independent party. The
information provided by Consumer Reports is comparable to
that provided by a CPA firm in an audit of financial statements.
1-18 a. The following parts of the definition of auditing are related to the
narrative:
(1) Altman is being asked to issue a report about qualitative and
quantitative information for trucks. The trucks are therefore
the information with which the auditor is concerned.
(2) There are four established criteria which must be evaluated
and reported by Altman: existence of the trucks on the night
of June 30, 2016, ownership of each truck by Regional
Delivery Service, physical condition of each truck and fair
market value of each truck.
(3) Samantha Altman will accumulate and evaluate four types of
evidence:
(a) Count the trucks to determine their existence.
(b) Use registration documents held by Burrow for
comparison to the serial number on each truck to
determine ownership.
(c) Examine the trucks to determine each truck's physical
condition.
(d) Examine the blue book to determine the fair market
value of each truck.
(4) Samantha Altman, CPA, appears qualified, as a competent,
independent person. She is a CPA, and she spends most of
her time auditing used automobile and truck dealerships and
has extensive specialized knowledge about used trucks
that is consistent with the nature of the engagement.

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1-10
1-18 (continued)
(5) The report results are to include:
(a) which of the 25 trucks are parked in Regional's
parking lot the night of June 30.
(b) whether all of the trucks are owned by Regional
Delivery Service.
(c) the condition of each truck, using established
guidelines.
(d) fair market value of each truck using the current blue
book for trucks.
b. The only parts of the audit that will be difficult for Altman are:
(1) Evaluating the condition, using the guidelines of poor, good,
and excellent. It is highly subjective to do so. If she uses a
different criterion than the "blue book," the fair market value
will not be meaningful. Her experience will be essential in
using this guideline.
(2) Determining the fair market value, unless it is clearly defined
in the blue book for each condition.
1-19 a. The major advantages and disadvantages of a career as an IRS
agent, CPA, GAO auditor, or an internal auditor are:
EMPLOYMENT ADVANTAGES DISADVANTAGES
INTERNAL
REVENUE
AGENT
1. Extensive training in
individual, corporate, gift,
trust and other taxes is
available with concentration
in area chosen.
2. Hands-on experience with
sophisticated selection
techniques.
1. Experience limited to
taxes.
2. No experience with
operational or financial
statement auditing.
3. Training is not extensive
with any business
enterprise.
CPA 1. Extensive training in audit of
financial statements,
compliance auditing and
operational auditing.
2. Opportunity for experience in
auditing, tax consulting, and
management consulting
practices.
3. Experience in a diversity of
enterprises and industries
with the opportunity to
specialize in a specific
industry.
1. Exposure to taxes and to
the business enterprise
may not be as in-depth as
the internal revenue agent
or the internal auditor.
2. Likely to be less exposed
to operational auditing
than is likely for internal
auditors.

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1-11
1-19 (continued)
EMPLOYMENT ADVANTAGES DISADVANTAGES
INTERNAL
AUDITOR
1. Extensive exposure to all
segments of the enterprise
with which employed.
2. Constant exposure to one
industry presenting
opportunity for expertise in
that industry.
3. Likely to have exposure to
compliance, financial, and
operational auditing.
1. Little exposure to taxation
and the audit of taxes.
2. Experience is limited to
one enterprise, usually
within one or a limited
number of industries.
GAO AUDITOR 1. Increasing opportunity for
experience in operational
auditing.
2. Exposure to highly
sophisticated statistical
sampling and computer
auditing techniques.
1. Little exposure to diversity
of enterprises and
industries.
2. Bureaucracy of federal
government.
b. The two best choices for the senior interested in becoming a
certified fraud examiner would be starting out as either a CPA or an
internal auditor. A CPA gains experience with internal controls and
has an understanding of incentives and opportunities to commit
fraud. An internal auditor gains experience with internal controls
and has an in-depth understanding of operations and the many
facets of a business. IRS agents and GAO auditors would be in
demand for fraud examinations relating specifically to tax fraud or
governmental entities.
c. Other auditing careers that are available are:
 Auditors within many of the branches of the federal government
(e.g., Department of Homeland Security)
 Auditors for many state and local government units (e.g.,
state insurance or bank auditors)

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1-12
1-20 The most likely type of auditor and the type of audit for each of the examples
are:
EXAMPLE a. TYPE OF AUDITOR b. TYPE OF AUDIT
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
IRS
IRS
Internal auditor or CPA
CPA
Internal auditor or CPA
Internal auditor or CPA
Internal auditor or CPA
CPA or internal auditor
GAO
CPA
GAO
GAO
Compliance
Compliance
Financial statements or operational
Financial statements
Compliance
Compliance
Operational
Financial statements
Operational
Financial statements
Financial statements
Compliance
1-21 a. Financial statement audits reduce information risk, which lowers
borrowing costs. An audit also provides assurances to management
about information used for decision-making purposes, and may also
provide recommendations to improve efficiency or effectiveness of
operations.
b. Czarnecki and Hogan likely provide tax services, accounting
services, and management advisory services. They may also provide
additional assurance and attestation services other than audits of
financial statements.
c. Student answers will vary. They may identify new types of information
that require assurance, such as environmental or corporate
responsibility reporting. Students may also identify opportunities
for consulting or management advisory services, such as assistance
with the adoption of International Financial Reporting Standards.
1-22 a. Assurance related to financial statements are the most likely forms
of assurance that are likely to be provided only by public accounting
firms. Examples include audits of historical financial statements,
reviews of historical financial statements, audits of internal control
over financial reporting, and compliance auditing such as that
required by the Single Audit Act and OMB Circular A-133 (although
these audits may also be provided by government auditors).

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1-13
1-22 (continued)
b. There are many types of information that are assured by providers
other than public accounting firms. Some of these assurances are
provided by government entities, such as food inspections, elevator
inspections, and pumps at gasoline stations. Other assurances are
provided by nonprofit and for-profit assurance providers, such as
ISO 9000 certifications.
c. Table 1-1 on p. 11 includes some examples of assurance that may
be provided by public accounting firms or other assurance
providers. For example, assurance on corporate responsibility and
sustainability may be provided by public accounting firms or other
assurance providers. Other examples included assurance on Web
site controls, and information such as Web site traffic or newspaper
circulation.
1-23 a. The vision of the Global Reporting Initiative (GRI) is a sustainable
global economy where organizations manage their economic,
environmental, social and governance performance and impacts
responsibly, and report transparently. Its mission is to make
sustainability reporting standard practice by providing guidance and
support to organizations.
b. According to the GRI “A sustainability report is a report published
by a company or organization about the economic, environmental,
and social impacts caused by its everyday activities. A
sustainability report also presents the organization's values and
governance model, and demonstrates the link between its strategy
and its commitment to a sustainable global economy.”
In an integrated report, sustainability information is included
along with financial information. These reports emphasize the links
between financial and non-financial performance. An integrated
report also presents the risks and opportunities the company faces,
integrated with disclosure of environmental, social, and governance
issues.
c. GRI offers two “in accordance” reporting options, Core and
Comprehensive. The Core report provides the essential elements
of a sustainability report. The Comprehensive report includes
additional disclosures of the organization’s strategy and analysis,
governance, and ethics and integrity. The GRI recommends
external assurance, but it is not required for either type of “in
accordance” report.

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1-14
1-24 a. Answers will vary by state. Most states require 150 hours of
education, with specific requirements for number of accounting hours
and credit hours in other subject areas.
b. Answers will vary by state. Many states require one or two years of
work experience gained in public practice, or possibly government,
academia or industry, depending on the state. In many states,
experience in industry or internal audit is sufficient, depending on the
type of work performed.
c. Most states have frequently addressed questions. Many of these
address education requirements, as well as information on how to
prepare for the exam, as well as information on applying for licensure.
d. The Elijah Watt Sells award program was established in 1923
by the American Institute of Certified Public Accountants
(AICPA) to recognize outstanding performance on the Uniform
CPA Examination. The award is presented to candidates who
obtained a cumulative average score above 95.50 across all four
sections of the Uniform CPA Examination, completed testing during
the previous calendar year, and passed all four sections of the
Examination on their first attempt.
e. Passing information is available on the CPA Examination portion of
the AICPA web site. Recent passing rates have ranged from
approximately 44% to 59% across the four sections.

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2-1
Chapter 2
The CPA Profession
 Concept Checks
P. 28
1. The four major services that CPAs provide are:
a. Audit and assurance services Assurance services are independent
professional services that improve the quality of information for
decision makers. Assurance services include attestation services,
which are any services in which the CPA firm issues a report that
expresses a conclusion about the reliability of an assertion that is the
responsibility of another party. The four categories of attestation
services are audits of historical financial statements, attestation on the
effectiveness of internal control over financial reporting, reviews of
historical financial statements, and other attestation services.
b. Accounting and bookkeeping services Accounting services involve
preparing the client’s financial statements from the client’s records.
Bookkeeping services include the preparation of the client’s journals and
ledgers as well as financial statements.
c. Tax services Tax services include preparation of corporate, individual,
and estate returns as well as tax-planning assistance.
d. Management consulting and risk advisory services These
services range from suggestions to improve the client’s accounting
system to advice on risk management or on computer installations.
2. The six organizational structures available to CPA firms are proprietorship,
general partnership, general corporation, professional corporation, limited
liability company, and limited liability partnership. CPA firms are typically not
organized as a general partnership because a general partnership offers less
protection from legal liability relative to other structures such as a limited
liability partnership.
P. 38
1. The Public Company Accounting Oversight Board provides oversight for
auditors of public companies, including establishing auditing and quality
control standards for public company audits, and performing inspections of
the quality controls at audit firms performing those audits.

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2-2
Concept Checks (continued)
2. The AICPA is the organization that sets professional requirements for
CPAs. The AICPA also conducts research and publishes materials on
many different subjects related to accounting, auditing, management
consulting and advisory services, and taxes. The organization also prepares
and grades the CPA examinations, provides continuing education to its
members, and develops specialty designations to help market and assure the
quality of services in specialized practice areas.
3. International Standards on Auditing (ISAs) are issued by the International
Auditing and Assurance Standards Board (IAASB) of the International
Federation of Accountants (IFAC) and are designed to improve the
uniformity of auditing practices and related services throughout the
world. AICPA Statements on Auditing Standards (SASs) are established by
the Auditing Standards Board of the AICPA, and are applicable to private
entities within the United States. As a result of efforts by the Auditing
Standards Board of the AICPA to converge U.S. standards with international
standards, AICPA auditing standards and International Standards on Auditing
are similar in most respects. PCAOB Auditing Standards apply only to U.S.
publicly traded companies and other SEC registrants, including broker-
dealers. However, given that the PCAOB initially adopted existing standards
established by the Auditing Standards Board as interim auditing standards,
standards for audits of U.S. public and private companies are mostly similar.
 Review Questions
2-1 The major characteristics of CPA firms that permit them to fulfill their social
function competently and independently are:
1. Organizational form A CPA firm exists as a separate entity to avoid
an employer-employee relationship with its clients. The CPA firm
employs a professional staff of sufficient size to prevent one client
from constituting a significant portion of total income and thereby
endangering the firm’s independence.
2. Conduct A CPA firm employs a professional staff of sufficient size
to provide a broad range of expertise, continuing education, and
promotion of a professional independent attitude and competence.
3. Peer review This practice evaluates the performance of CPA firms
in an attempt to keep competence high.
2-2 The Public Company Accounting Oversight Board (PCAOB) was
established by the Sarbanes-Oxley Act of 2002 in the wake of multiple
accounting scandals and alleged audit failures, including those of Enron and
WorldCom. The PCAOB provides oversight for auditors of public companies,
including establishing auditing and quality control standards for public company
audits, and performing inspections of the quality controls at audit firms
performing those audits.

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2-3
2-3 The purpose of the Securities and Exchange Commission is to assist in
providing investors with reliable information upon which to make investment
decisions. Since most reasonably large CPA firms have clients that must file
reports with the SEC each year (all companies filing registration statements
under the securities acts of 1933 and 1934 must file audited financial statements
and other reports with the SEC at least once each year), the profession is highly
involved with the SEC requirements.
The SEC has considerable influence in setting generally accepted
accounting principles and disclosure requirements for financial statements
because of its authority for specifying reporting requirements considered
necessary for fair disclosure to investors. In addition, the SEC has power to
establish rules for any CPA associated with audited financial statements submitted
to the Commission.
2-4 Statements on Standards for Attestation Engagements provide a framework
for attest engagements, including detailed standards for specific types of
attestation engagements.
2-5 The PCAOB has responsibility for establishing auditing standards for U.S.
public companies, while the Auditing Standards Board (ASB) of the AICPA
establishes auditing standards for U.S. private companies. Prior to the creation of
the PCAOB, the ASB had responsibility for establishing auditing standards for
both public and private companies. Because existing auditing standards were
adopted by the PCAOB as interim auditing standards for public company audits,
there is considerable overlap in the two sets of auditing standards.
2-6 International Standards on Auditing (ISAs) are issued by the International
Auditing and Assurance Standards Board (IAASB) of the International Federation
of Accountants (IFAC) and are designed to improve the uniformity of auditing
practices and related services throughout the world. The IAASB issues
pronouncements on a variety of audit and attest functions and promotes their
acceptance worldwide. As a result of efforts by the Auditing Standards Board to
converge U.S. GAAS with international standards, AICPA auditing standards and
International Standards on Auditing are similar in most respects.
2-7 Auditing standards represent the combination of the four principles and all
the Statements on Auditing Standards (SASs) that are codified in the AU-C sections.
The principles outlined in Figure 2-2 provide a framework for the auditing
standards. Examples of auditing standards include any of the SASs (e.g., SAS No.
125), covering topics such as audit planning or assessing the risk of material
misstatement.
Generally accepted accounting principles are specific rules for accounting
for transactions occurring in a business enterprise. Examples may be any of the
opinions of the FASB, such as accounting for leases, pensions, or fair value
assets.

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2-4
2-8 Auditors develop their competency and capabilities for performing an audit
through formal education in auditing and accounting, adequate practical
experience, and continuing professional education. Auditors can demonstrate
their proficiency by becoming licensed to practice as CPAs, which requires
successful completion of the Uniform CPA Examination. The specific requirements
for licensure vary from state to state.
2-9 For the most part, auditing standards, including SASs, are general rather
than specific. Many practitioners along with critics of the profession believe the
standards should provide more clearly defined guidelines as an aid in
determining the extent of evidence to be accumulated. This would eliminate
some of the difficult audit decisions and provide a source of defense if the CPA is
charged with conducting an inadequate audit. On the other hand, highly specific
requirements could turn auditing into mechanical evidence gathering, void of
professional judgment. From the point of view of both the profession and the
users of auditing services, there is probably a greater harm from defining
authoritative guidelines too specifically than too broadly.
2-10 Quality controls are the procedures used by a CPA firm that help it meet its
professional responsibilities to clients. Quality controls are therefore established
for the entire CPA firm as opposed to individual engagements.
2-11 The element of quality control is personnel management. The purpose of
the requirement is to help assure CPA firms that all new personnel are qualified
to perform their work competently. A CPA firm must have competent employees
conducting the audits if quality audits are to occur.
2-12 A peer review is a review, by CPAs, of a CPA firm’s compliance with its
quality control system. A mandatory peer review means that such a review is
required periodically. AICPA member firms are required to have a peer review
every three years. Registered firms with the PCAOB are subject to quality
inspections. These are different than peer reviews because they are performed
by independent inspection teams rather than another CPA firm.
Peer reviews can be beneficial to the profession and to individual firms. By
helping firms meet quality control standards, the profession gains if reviews result
in practitioners doing higher quality audits. A firm having a peer review can also
gain if it improves the firm’s practices and thereby enhances its reputation and
effectiveness, and reduces the likelihood of lawsuits. Of course, peer reviews are
costly. There is always a trade-off between cost and benefits.
 Multiple Choice Questions From CPA Examinations
2-13 a. (2) b. (3) c. (3)
2-14 a. (1) b. (2) c. (1)
 Multiple Choice Questions From Becker CPA Exam Review
2-15 a. (1) b. (4) c. (3)

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2-5
 Discussion Questions And Problems
2-16 a. The main objective of an audit of financial statements is to obtain
reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or
error, thereby enabling the auditor to express an opinion in a written
report on whether the financial statements are presented fairly, in
all material respects, in accordance with an applicable financial
reporting framework.
b. No. In an audit of the financial statements, the auditor performs
audit procedures to obtain reasonable assurance about whether the
financial statements contain material misstatements. While a high
level of assurance, reasonable assurance is less than a guarantee―
which implies absolute (100%) assurance. In an audit, the auditor
issues an opinion on whether the financial statements are presented
fairly, but the auditor is not guaranteeing that the financial statements
are accurate with certainty.
c. No. Fraud is a broad legal concept that describes any intentional
deceit meant to deprive another person or party of their property or
rights. The auditor does not take responsibility for detecting all
types of fraud, given many types of fraud do not impact the financial
statements. Instead, the auditor performs auditing procedures to
obtain reasonable assurance that the financial statements do not
contain material misstatements, whether due to fraud or error.
Thus, the auditor is concerned with detecting fraud that leads to a
material misstatement. The auditor is not responsible for detecting
fraud that does not lead to a material misstatement.
d. Each entity faces a number of risks unique to the nature of its
business and industry. The types of operations, the extent of
regulation, how the organization obtains capital to fund its business
model, and the nature of accounts in the financial statements,
among other factors, each trigger different types of risks that could
lead to material misstatements. In addition, there are unique
accounting standards for certain industries that impact how
transactions, accounts, and disclosures are reported in financial
statements. Thus, a thorough understanding of the client’s business
e. is critical to assessing the risk of material misstatements in the
financial statements when planning the audit.The auditor is
responsible for obtaining sufficient appropriate audit evidence
about whether the financial statements are free of material
misstatements. In addition to understanding whether the amounts
reported in the financial statements are mathematically accurate,
the auditor obtains other types of information to determine that the
amounts reported represent valid transactions and accounts and that
all valid transactions and accounts are included in those
statements. Evidence is also gathered to determine that the entity
has the rights to assets and has the obligation to repay liabilities

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2-6
2-16 (continued)
reflected in those financial statements and whether the correct
disclosures are included in the financial statements as required by
accounting standards.
2-17 a. Engagement performance
b. Leadership responsibilities
c. Monitoring
d. Engagement performance
e. Engagement performance
f. Relevant ethical requirement
g. Human resources
h. Human resources
i. Acceptance and continuation of clients and engagements
j. Engagement performance
2-18 a. The AICPA Auditing Standards Board (ASB) is responsible for
issuing standards in the U.S. to be used by auditors when auditing
the financial statements of all entities other than U.S. publicly
traded companies. The Public Company Accounting Oversight Board
(PCAOB) is responsible for issuing standards to be used by auditors
when auditing a U.S. public company or other entities registered
with the SEC (e.g., broker-dealers).
b. The International Auditing and Assurance Standards Board (IAASB)
of the International Federation of Accountants (IFAC) is responsible
for issuing International Standards on Auditing (ISAs). The ISAs do
not override a specific country’s regulations governing the audit of
financial statements.
c. The ASB has revised most of its standards to converge them with
the international standards. As a result, U.S. standards are mostly
consistent with international standards, except for certain requirements
that reflect unique characteristics of the U.S. environment.
d. When developing a new SAS, the ASB uses the ISAs as the
base standard and then modifies that base standard only when
appropriate for the U.S. environment.
e. The PCAOB develops and issues its standards. While the PCAOB
considers existing international standards, it does not start with
the ISA standard as the base.
f. When conducting an audit of a client that is listed on both a foreign
stock exchange and a U.S. stock exchange, the auditor would have
to satisfy both the relevant international auditing standards as well
as the PCAOB auditing standards. This does not mean the auditor
conducts two separate audits, but rather their procedures must
satisfy both sets of standards, which will be similar in many ways
but may also require the auditor to perform additional procedures
required by one, but not the other, set of standards.

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2-7
2-19 a. AICPA auditing standards.
b. International auditing standards.
c. PCAOB auditing standards.
d. PCAOB auditing standards (reporting in the U.K. will be under
international auditing standards).
e. AICPA auditing standards.
f. AICPA auditing standards.
g. PCAOB auditing standards.
h. International auditing standards.
2-20
BRIEF DESCRIPTION
OF PRINCIPLE
HOLMES’ ACTIONS RESULTING IN
FAILURE TO COMPLY WITH PRINCIPLE
RESPONSIBILITIES
PRINCIPLES
The auditor must possess the
competency and capabilities
to perform the audit.
It was inappropriate for Holmes to hire the two
students to conduct the audit. The audit must
be conducted by persons with proper
education and experience in the field of
auditing. Although a junior assistant has not
completed his formal education, he may help in
the conduct of the audit as long as there is
proper supervision and review.
The auditor must comply
with ethical requirements, which
include maintaining
independence in mental attitude
in all matters relating to the
audit.
To satisfy this principle, Holmes must be without
bias with respect to the client under audit.
Holmes has an obligation for fairness to the
owners, management, and creditors who may
rely on the report. Because of the financial
interest in whether the bank loan is granted to
Ray, Holmes is independent in neither fact nor
appearance with respect to the assignment
undertaken.
The auditor must maintain
professional skepticism and
exercise professional judgment
in the performance of the audit
and the preparation of the
report.
This principle requires Holmes to perform the
audit with due care, which imposes on Holmes
and everyone in Holmes’ organization a
responsibility to observe the principles of
performance and reporting. Maintaining
professional skepticism and exercising
professional judgment require critical review at
every level of supervision of the work done and
the judgments exercised by those assisting in
the audit. Holmes did not review the work or
the judgments of the assistants and clearly
failed to adhere to this standard.

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2-8
2-20 (continued)
BRIEF DESCRIPTION
OF PRINCIPLE
HOLMES’ ACTIONS RESULTING IN
FAILURE TO COMPLY WITH PRINCIPLE
PERFORMANCE
PRINCIPLES
The auditor must adequately plan
the work and must properly
supervise any assistants.
This principle recognizes that early appointment
of the auditor has advantages for the auditor
and the client. Holmes accepted the
engagement without considering the
availability of competent staff. In addition,
Holmes failed to supervise the assistants. The
work performed was not adequately planned.
The auditor must identify and
assess the risks of material
misstatement based on a
sufficient understanding of the
entity and its environment,
including its internal control, to
design the nature, timing, and
extent of further audit
procedures.
Holmes did not obtain an understanding of the
entity or its internal control, nor did the
assistants obtain such an understanding.
There appears to have been no audit at all.
The work performed was more an accounting
service than it was an auditing service.
The auditor must obtain sufficient
appropriate audit evidence by
performing audit procedures to
afford a reasonable basis for an
opinion regarding the financial
statements under audit.
Holmes acquired no evidence that would
support the financial statements. Holmes
merely checked the mathematical accuracy of
the records and summarized the accounts.
Standard audit procedures and techniques
were not performed.

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2-9
2-20 (continued)
BRIEF DESCRIPTION
OF PRINCIPLE
HOLMES’ ACTIONS RESULTING IN
FAILURE TO COMPLY WITH PRINCIPLE
REPORTING
PRINCIPLES
The auditor must express an
opinion in a written report about
whether the financial statements
are presented in accordance
with the applicable financial
reporting framework.
The auditor must either express
an opinion regarding the
financial statements, taken as a
whole, or state that an opinion
cannot be expressed in the
auditor’s report. When the
auditor cannot express an
overall opinion, the auditor
should state the reasons
therefor in the auditor’s report.
In all cases where an auditor’s
name is associated with
financial statements, the auditor
should clearly indicate the
character of the auditor’s work,
if any, and the degree of
responsibility the auditor is
taking, in the auditor’s report.
Holmes’ report made no reference to generally
accepted accounting principles. Because
Holmes did not conduct a proper audit, the
report should state that no opinion can be
expressed as to the fair presentation of the
financial statements in accordance with
generally accepted accounting principles.
Although Holmes’ report contains an expression
of opinion, such opinion is not based on the
results of a proper audit. Holmes should
disclaim an opinion because he failed to
conduct an audit in accordance with auditing
standards.
The auditor must assess whether
the financial statements are
presented in accordance with
the financial reporting
framework.
Holmes’ improper audit would not enable him to
determine whether generally accepted
accounting principles were consistently
applied. Holmes’ report should make no
reference to the consistent application of
accounting principles.
Management is primarily responsible for
adequate disclosures in the financial
statements, but when the statements do
not contain adequate disclosures the auditor
should make such disclosures in
the auditor’s report. In this case both the
statements and the auditor’s report lack
adequate disclosures.

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2-10
2-21 a. The objective of the IAASB is to serve the public interest by setting
high-quality auditing and assurance standards and by facilitating
the convergence of international and national standards, thereby
enhancing the quality and uniformity of practice throughout the
world and strengthening public confidence in the global auditing
and assurance profession. International Standards on Auditing
(ISA) are used by auditors in countries that have adopted ISAs as
their auditing standards
b. The IAASB follows a due process in setting standards.
 The standards-setting Public Interest Activity Committees (PIAC)
identify new projects based on review of international developments
and consultation with the Public Interest Oversight Board. PIAC
meetings are open to the public and written materials are prepared
in English.
 The PIAC is responsible for consulting with the PIAC Consultative
Advisory Group (CAG) on the identification and prioritization
of projects to be undertaken by the PIAC.
 The project may be assigned to a task force, which considers
whether to hold a public forum or roundtable.
 When the Project Task Force is satisfied that it has a proposed
draft pronouncement that is ready for exposure, it presents the
draft to the PIAC for approval. The PIAC votes on the approval
of the exposure draft.
 Draft pronouncements are exposed for a minimum of 90 days.
 The task force considers all comments and whether re-exposure
is needed.
 When the Project Task Force is satisfied that it has a proposed
final pronouncement ready for approval, it presents the revised
content of the exposed standard to the PIAC for approval.
 The PIAC votes on the approval or withdrawal of the
pronouncement.
c. The IAASB is committed to transparency. Where practicable, meetings
are broadcast over the Internet or recorded. Meeting agendas and
minutes are published on the International Federation of Accountants
(IFAC) Web site. All exposure drafts are subject to public exposure
for a minimum of 90 days. Meetings of the PIAC are open to the
public.

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3-1
Chapter 3
Audit Reports
 Concept Checks
P. 57
1. The standard unmodified opinion audit report for a nonpublic entity contains
the following eight parts:
1. Report title: Auditing standards require that the report be titled and
that the title includes the word independent.
2. Audit report address: The report is usually addressed to the company,
its stockholders, or the board of directors.
3. Introductory paragraph: The introductory paragraph of the report
makes the simple statement that the CPA firm has done an audit.
Second, 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.
4. Management’s responsibility: This paragraph indicates that the
financial statements are the responsibility of management, including
selecting appropriate accounting principles and maintaining internal
control over financial reporting. The paragraph must be preceded
by the heading “Management’s Responsibility for the Financial
Statements”.
5. Auditor’s responsibility: The auditor’s responsibility section of the
report includes three paragraphs and it must include the heading
“Auditor’s Responsibility”. The first paragraph indicates that the
auditor’s responsibility is to express an opinion on the statements
based on an audit conducted in accordance with auditing standards,
and that the audit provides reasonable assurance that the financial
statements are free of material misstatement.
The second paragraph is the scope paragraph and is a factual
statement about what the auditor did in the audit. The paragraph
briefly describes important aspects of an audit, including that the
procedures depend on the auditor’s judgment and assessment of
the risks of material misstatements. The scope paragraph also
indicates that the auditor considers the entity’s internal control, but
not for the purposes of expressing an opinion on the effectiveness
of internal control over financial reporting. The last sentence of the
paragraph indicates that the audit includes evaluating the
appropriateness of accounting policies selected, the reasonable-
ness of accounting estimates, and the overall financial statement
presentation.

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3-2
Concept Check, P. 57 (continued)
The third paragraph indicates that the auditor believes the
audit evidence is sufficient and appropriate to provide a basis for
the audit opinion.
6. Opinion paragraph: The final paragraph in the standard report states
the auditor’s conclusions based on the results of the audit. The
paragraph must include the title “Opinion”.
7. Signature and Address of CPA firm: The name identifies the CPA
firm or practitioner who performed the audit, and the city and
state where the auditor is located.
8. Audit report date: The appropriate date for the report is the one on
which the auditor completed the auditing procedures needed to
obtain sufficient appropriate evidence to support the opinion.
2. The auditor should include an explanatory paragraph in an unmodified
opinion audit report when the audit is completed with satisfactory results and
the financial statements are fairly presented, but the auditor believes it is
important to draw the reader’s attention to certain matters or the auditor is
required to provide additional information. The following are the most
important causes of the addition of an emphasis of matter explanatory
paragraph or a modification in the wording of the standard unmodified opinion
audit report:
• Lack of consistent application of generally accepted accounting
principles
• Substantial doubt about going concern
• Auditor agrees with a departure from promulgated accounting
principles
• Emphasis of other matters
• Reports involving other auditors
P. 69
1. The three conditions requiring a departure from an unmodified opinion are:
1. The scope of the audit has been restricted. One example is when the
client will not permit the auditor to confirm material receivables. Another
example is when the engagement is not agreed upon until after the client’s
year-end when it may be impossible to physically observe inventories.
2. The financial statements have not been prepared in accordance with
generally accepted accounting principles. An example is when the client
insists upon using replacement costs for fixed assets.
3. The auditor is not independent. An example is when the auditor owns
stock in the client’s business.

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3-3
Concept Check, P. 69 (continued)
2. The three alternative opinions that may be appropriate when the client’s
financial statements are not in accordance with GAAP are an unmodified
opinion, qualified as to opinion only, and adverse opinion. Determining which is
appropriate depends entirely upon materiality. An unmodified opinion is
appropriate if the GAAP departure is immaterial (standard unmodified) or
if the auditor agrees with the client’s departure from GAAP (unmodified
with explanatory paragraph). A qualified opinion is appropriate when the
deviation from GAAP is material but not highly material; the adverse opinion
is appropriate when the deviation is highly material.
 Review Questions
3-1 Auditors’ reports are important to users of financial statements because
they inform users of the auditor’s opinion as to whether or not the financial
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 unmodified report and the reasons and implications of
such deviations. Having standard wording improves communications for the
benefit of users of the auditor’s report. When there are departures from the
standard wording, users are more likely to recognize and consider situations
requiring a modification or qualification to the auditor’s report or opinion.
3-2 The purpose of the scope paragraph under the auditor’s responsibility is
to inform the financial statement users of the nature of the audit procedures
performed. The information in the scope paragraph includes:
1. An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the financial statements.
2. The audit procedures selected depend on the auditor’s judgment,
and consider the auditor ’s assessment of the risks of material
misstatement, whether due to fraud or error.
3. As part of this risk assessment, the auditor considers internal
control over financial reporting in the design of the audit procedures.
The assessment is not for the purpose of expressing an opinion on
internal control over financial reporting, and the auditor does not
express such an opinion.
4. An audit includes evaluating the appropriateness of the accounting
policies used, the reasonableness of significant estimates, and the
overall presentation of the financial statements.
3-3 The purpose of the opinion paragraph is to state the auditor’s conclusions
based upon the results of the audit evidence. The most important information in
the opinion paragraph includes:

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3-4
3-3 (continued)
1. The words “in our opinion,” which indicate that the conclusions are
based on professional judgment.
2. A statement about whether the financial statements were presented
fairly and in accordance with generally accepted accounting
principles along with indication of the fiscal year(s) associated with
those statements.
3-4 The auditor’s report should be dated February 17, 2017, the date on which
the auditor concluded that he or she had sufficient appropriate evidence to support
the auditor’s opinion.
3-5 A standard unmodified opinion audit report may be issued under the
following circumstances:
1. All statements—balance sheet, income statement, statement of
retained earnings, and statement of cash flows—are included in
the financial statements.
2. Sufficient appropriate evidence has been accumulated and the
auditor has conducted the engagement in a manner that enables
him or her to conclude that the audit was performed in accordance
with auditing standards.
3. The financial statements are presented in accordance with
appropriate accounting standards such as U.S. generally accepted
accounting principles or IFRS. This also means that adequate
disclosures have been included in the footnotes and other parts of
the financial statements.
4. There are no circumstances requiring the addition of an explanatory
paragraph or modification of the wording of the report.
3-6 The introductory, scope, and opinion paragraphs are modified to include
reference to management’s report on internal control over financial reporting, and
the scope of the auditor’s work and opinion on internal control over financial
reporting. The introductory and opinion paragraphs also refer to the framework
used to evaluate internal control. Two additional paragraphs are added between
the scope and opinion paragraphs that define internal control and describe the
inherent limitations of internal control.
3-7 The standard unmodified opinion audit report for a non-public entity under
AICPA auditing standards and the standard unqualified report for a public company
under PCAOB auditing standards are very similar in substance. The introductory
paragraphs are similar, although the public company report includes the
responsibilities of management and the auditor. In contrast, the report for the
non-public entity in Figure 3-1 has separate paragraphs for management’s
and the auditor’s responsibility. These paragraphs provide additional
information on the nature of these responsibilities.

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3-5
3-7 (continued)
The scope paragraphs in each report are similar. However, there are
differences in the description of the nature of the auditor’s testing. The report for
the non-public company indicates that the procedures are based on the auditor’s
judgment and consider the risks of material misstatement. The report for the non-
public company also indicates that the auditor considers internal control in
designing the audit procedures, and not for the purpose of expressing an opinion
on internal control.
3-8 An unmodified opinion audit report with an explanatory paragraph or
modified wording is the same as a standard unmodified opinion report except
that the auditor believes it is necessary to provide additional information
about the audit or the financial statements. For a qualified report, either there
is a scope limitation (condition 1) or a failure to follow generally accepted
accounting principles (condition 2). Under either condition, the auditor
concludes that the overall financial statements are fairly presented.
Two examples of an unmodified opinion audit report with an explanatory
paragraph or modified wording are:
1. The entity changed from one generally accepted accounting principle
to another generally accepted accounting principle.
2. A shared report involving the use of other auditors.
3-9 When another CPA has performed part of the audit, the primary auditor
issues one of the following types of reports based on the circumstances.
1. No reference is made to the other auditor. This will occur if the other
auditor audited an immaterial portion of the financial statements,
the other auditor is known or closely supervised, or if the principal
auditor has thoroughly reviewed the other auditor’s work.
2. Issue a shared opinion in which reference is made to the other
auditor. This 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 CPA is material in relation to the
total.
3. The 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 CPA
is highly material.
3-10 Even though this change has been reflected in the financial statements, a
separate explanatory paragraph is required to explain the change in generally
accepted accounting principles in the first year in which the change took place.
3-11 Changes that affect the consistency of the financial statements may
involve any of the following:

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3-6
3-11 (continued)
a. Change in accounting principle
b. Change in reporting entity
c. Corrections of errors involving accounting principles.
An example 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 explanatory paragraph is required if the amounts are material.
Comparability refers to items such as changes in estimates, presentation,
and events rather than changes in accounting principles. For example, a change
in the estimated life of a depreciable asset will affect the comparability of the
statements. In that case, no explanatory paragraph for lack of consistency is
needed because the same method of depreciation is used in both years, but the
information may require disclosure in the statements.
3-12 When the audit report contains a qualified opinion, the eight elements of
the standard audit report are as follows:
1. Report title: Same as standard unmodified opinion report.
2. Audit report address: Same as standard unmodified opinion report.
3. Introductory paragraph: Same as standard unmodified opinion report.
4. Management’s responsibility: Same as standard unmodified opinion
report.
5. Auditor’s responsibility: The first two auditor responsibility paragraphs
are the same as the standard unmodified opinion report. The third
paragraph is modified to state that the audit evidence obtained
provides a sufficient and appropriate basis for the qualified audit
opinion.
That paragraph is following by a new paragraph that describes the
basis for the qualified opinion.
6. Opinion paragraph: The opinion paragraph is modified to include the
term except for in the opinion paragraph.
7. Signature and Address of CPA firm: Same as standard unmodified
opinion report.
8. Audit report date: Same as standard unmodified opinion report.
3-13 A qualified opinion states that there has been either a limitation on the
scope of the audit of material accounts, transactions, or disclosures or a material
departure from GAAP in the financial statements, but that the auditor believes
that the overall financial statements are fairly presented. This type of opinion may
not be used if the auditor believes the exceptions being reported upon are
extremely 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 GAAP the financial position, results of operations, or
cash flows.

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