Some words or phrases have been replaced with numbers (e.g., [1], [2], etc.) from an audit report for a nonissuer. Select from the option list provided the phrase that best matches each number in the draft report below.

Audit Report Draft

Qualified Opinion

We have audited the consolidated financial statements of ABCD Company and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 20X1 and 20X0, and the related consolidated statements of income, changes in stockholders equity, and cash flows for the years then ended, and the related notes to the financial statements.

In our opinion, except for [1] of the matter described in the Basis for Qualified Opinion section of our report, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of ABCD Company and its subsidiaries as of December 31, 20X1 and 20X0, and the results of their operations and their cash flows for the years then ended in accordance with [2] generally accepted in the United States of America.

Basis for Qualified Opinion

We were unable to obtain audited financial statements supporting the Companys investment in a foreign affiliate stated at $XXXX and $XXXX at December 31, 20X1 and 20X0, respectively, or its equity in earnings of that affiliate of $XXXX and $XXXX, which is included in net income for the years then ended as described in Note Y to the consolidated financial statements; nor were we able to satisfy ourselves as to the carrying value of the investment in the foreign affiliate or the equity in its earnings by other auditing procedures.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditors Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of ABCD Company and its subsidiaries and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the [3] we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.

Responsibilities of Management for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of [4] relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is required to evaluate whether conditions or events, considered in the aggregate, raise substantial doubt about ABCD Companys ability to continue as a going concern for one year after the date the financial statements are issued.

Auditors Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic disclosures of users made on the basis of the financial statements.

In performing an audit in accordance with GAAS, we

• Exercise [5] and maintain professional skepticism throughout the audit.
• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
• Obtain an understanding of internal control relevant to the audit 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 ABCD Companys internal control. Accordingly, no such opinion is expressed.
• Evaluate [6] of accounting policies used and the reasonableness of significant [7] made by management, as well as evaluate the overall presentation of the financial statements.
• Conclude whether, in our judgment, conditions or events, considered in the aggregate, raise substantial doubt about ABCD Companys ability to continue as a going concern for a reasonable period of time.

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, [8], and certain internal control-related matters that we identified during the audit.

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