In the overwhelming majority of cases, independent auditors issue unqualified, rather than qualified, opinions for their publicly traded clients since it is unusual (though not rare):

For a client's financial statements to depart materially from GAAP, For a client to fail to justify an accounting change, or For a client to impose scope limitations on the auditor, the three circumstances at Figure 3-9 for which an auditor would issue a qualified opinion.

Before issuing a qualified opinion, an auditor will first alert the client of an impending qualification, largely because in each of the three circumstances listed above the issue that gives rise to a qualification is not only correctable by the client, but if corrected would result in an unqualified opinion. For example, to avoid a qualified opinion, the client in most cases could simply comply with GAAP, avoid the unjustified accounting change, or lift the limitation on the scope of the engagement.

Required:

Using the annual report file in the AICPA's National Automated Accounting Research System (NAARS), the AICPA's Accounting Trends and Techniques, or copies of annual reports in a library, search for an example of one of the three circumstances requiring a qualified opinion. Draft a report that:
1. Explains the issue that gave rise to the circumstance (use both the explanatory paragraph and the footnote, if any, in the annual report), 

2. Compares the language used in the independent auditor's report to the language illustrated in the chapter, 

3. Gives your impressions of the likely tension that transpired between the client and the auditor in resolving that a qualified opinion was required. For example, why would the client decide that it was in their best interests to accept a qualified opinion rather than to correct the financial statements?

Transcribed Image Text:

Figure 3-9: Modifications to the Wording of Standard Reports Circumstance Material Highly Material Paragraph(s) Explanatory Modified Paragraph Opinion Based Partly on Introductory/ Another Opinion Auditor Unqualified Unqualified (optional) No Emphasize a Matter Unqualified Unqualified Yes Departure from GAAP Qualified Adverse Opinion Yes Inconsistency: Management Justifies Unqualified Unqualified Yes Management Does Not Justify Qualified Adverse Opinion Yes Scope Scope/ Limitation Qualified Opinion Yes Introductory/ Opinion: Disclaimer (Omit Scope) Yes Going Concern. Unqualified Unqualified Yes Omit Introductory, Lack of Scope, Independence Disclaimer Disclaimer Opinion Yes