Qualified Audit Report with EOM Paragraph

Howard and Co., CPAs, was hired to perform an audit of Fiona, Inc.s annual financial statements for the year ended December 31, Year 1. Fiona, Inc. is a nonissuer. A qualified opinion will be issued due to a material misstatement, with an emphasis-of-matter paragraph because there is also an uncertainty. A staff associate prepared the draft audit report below and has questions about the correct wording of the report based on the relevant professional standards.

For each of the questions in the table below, click the cell in the Phrase or Word column and select from the menu provided the appropriate word or phrase to complete the indicated sentence in the accountants report.

Draft of Independent Auditors Report

[Appropriate Addressee] Report on the Financial Statements

We have audited the accompanying financial statements of Fiona, Inc., which comprise the balance sheet as of December 31, Year 1, and the related statements of income, changes in stockholders equity, and cash flows for the year then ended, and the related notes to the financial statements. Managements Responsibility for the Financial Statements _________ (Question 1) is responsible for the _________ (Question 2) 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. Auditors Responsibility Our responsibility is to _______ (Question 3) on these financial statements based on our audit. We conducted our audit in accordance with _______ (Question 4). Those standards require that we plan and perform the audit to obtain _______ (Question 5) about whether the financial statements are free from material misstatement. An audit involves ___________ (Question 6) to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the _________ (Question 7), 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 entitys 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 entitys 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 _________ (Question 8) to provide a basis for our _________ (Question 9) audit opinion. Basis for Qualified Opinion The Company has stated inventories at cost in the accompanying balance sheet. 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 would have been required as of December 31, 20X1. Accordingly, cost of sales would have been increased by $XXX and net income, income taxes, and stockholders equity would have been reduced by $XXX, $XXX, and $XXX, as of and for the year ended December 31, 20X1, 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 the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note X to the financial statements, the Company is a defendant in a lawsuit [briefly describe the nature of the litigation consistent with the Companys description in the note to the financial statements]. Our opinion is _________ (Question 10) with respect to this matter. Howard and Co., CPAs New York City, NY March 12, Year 2

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