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U N M O D I F I E D O P I N I O N

QUAL I F I E D

" EXCEPT FO R" " EXCEPT FOR"

1. Policy 1. Insufficient Evidence

2. Presentation 3. Disclosures 4. Estimates

ADVERSE DISCLAIMER

1. Accounting Policy 1. Insufficient Evidence

2. Presentation 2. Significant Going

3. Disclosures Concern Uncertainty

4. Estimates 3. Lack of Independence

WITH D RAW

False, Fraudulent, Deceptive, or Misleading

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A. Qualified Opinion vs. Adverse Opinion

The auditor uses professional judgment 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.

Financial Statements are Inability to Obtain Sufficient Materially Misstated Appropriate Audit Evidence

Materiality of Problem (GAAP Issues) (GAAS Issues)

None or immaterial ⁼ Unmodified Unmod ified

Material but not pervasive = Qualified Opinion Qualified Opinion Material and pervasive ⁼ Adverse Opinion Disclaimer of Opinion

1 . Qualified 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.

2. Adverse Opinion

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.

B. Nature of Material Misstatements

A material misstatement of the financial statements may arise in relation to the following:

1. The appropriateness of accounting policies 2 . The application of accounting policies

3. The appropriateness of the financial statement presentation or the appropriateness or adequacy of disclosures in the financial statements

C. Appropriateness of Accounting Policies

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.

D. Application of Accounting Policies

Material misstatements related to the application of accounting policies may arise when:

1. management has not applied accounting policies in accordance with the applicable financial reporting framework;

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.

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E. Appropriateness of Financial Statement Presentation or Disclosures

Material misstatements relat'ed 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;

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.

F. Form and Content of Auditor's Report

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.

1 . Modification of Auditor's Responsibility Paragraph

When the auditor expresses a qualified or adverse opinion, the Auditor's Responsibility paragraph should be amended to state that the auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for the auditor's modified audit opinion.

2. Basis for Modification Paragraph

The Basis for Modification paragraph should be placed immediately before the opinion paragraph and should use the heading "Basis for Qualified Opinion" or "Basis for Adverse Opinion," as appropriate. The basis for modification paragraph should include:

a. A description and quantification of the financial effects of any misstatement that relates to specific amounts in the financial statements.

(1) If it is not practicable to quantify the financial effects, this should be stated . (2) If disclosure of the financial effects is made in the notes to the financial

statements, the basis for modification paragraph can be shortened by referring to the disclosure.

b. An explanation of how disclosures are misstated if there is a material misstatement related to narrative disclosure.

c. 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.

P A S S K E Y

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 a 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.

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3. Opinion Paragraph

When the auditor expresses a qualified or adverse opinion, the opinion paragraph should have the heading "Qualified Opinion" or "Adverse Opinion ," as appropriate.

a. 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.

b. 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 are not presented fairly in accordance with the applicable financial reporting framework.

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4. Sample Report-Qualified Opinion Due to Inadequate Disclosure

INDEPENDENT AUDITOR'S REPORT [Appropriate Addressee]

We have audited the accompanying financial statements of ABC Company, which comprise the balance sheets as of December 31, 20X1 and 20XO, and the related statements of income, changes in stockholders' equity, and cash flows for the years then ended, and the related notes to the financial statements.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. 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 from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

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

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.

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, 20X1 and 20XO, 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.

[Auditor's signature]

[Auditor's city and state]

[Date of the auditor's report]

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5. Sample Report-Qualified Opinion Due to a Material Misstatement of the Financial Statements

INDEPENDENT AUDITOR'S REPORT [Appropriate Addressee]

Management's Responsibility fo'. the Financial Statements

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.

Basis for Qualified Opinion

The Company has stated inventories at cost in the accompanying balance sheets. Accounting principles generally accepted in the United States of America require inventories to be stated at the lower of cost or market. If the Company stated inventories at the lower of cost or market, a write down of $XXX and $XXX would have been required as of December 31, 20X1 and 20XO, respectively. Accordingly, costs of sales would have increased by $XXX and $XXX, and net income, income taxes, and stockholders' equity would have been reduced by $XXX, $XXX, and

$XXX, and $XXX, $XXX, and $XXX, as of and for the years ended December 31, 20X1 and 20XO, respectively.

Qualified Opinion

In our opinion, except for the effects of the matter 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, 20X1 and 20XO, 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.

[Auditor's signature]

[Auditor's city and state]

[Date of the auditor's report]

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6. Sample Report-Adverse Opinion Due to a Material Misstatement of the Financial Statements

INDEPENDENT AUDITOR'S REPORT [Appropriate Addressee]

Auditing 1

We have audited the accompanying consolidated financial statements of ABC Company and its subsidiaries, which comprise the balance sheet as of December 31, 20X1, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the year then ended, and the related notes to the financial statements.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the U nited States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting poliCies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

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

Basis for Adverse Opinion

As described in Note X, the Company has not consolidated the financial statements of subsidiary XVZ Company that it acquired during 20X1 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. 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 XVZ 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.

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 subsidiaries as of December 31, 20X1, or the results of their operations or their cash flows for the year then ended.

[Auditor's signature]

[Auditor's city and state]

[Date of the auditor's report]

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