audit reports

(3) a client-imposed scope limitation.
(4) the qualification of an opinion by the other auditor of a subsidiary when
responsibility has been divided.
c. The opinion paragraph of a CPA’s report states: “In our opinion, except for the effects
of not capitalizing certain lease obligations, as discussed in the preceding paragraph,
the financial statements present fairly,” in all material respects, … This paragraph
expresses a(an)
(1) Unqualified opinion.
(2) Unqualified opinion with explanatory paragraph.
(3) Qualified opinion.
(4) Adverse opinion.
DISCUSSION QUESTIONS AND PROBLEMS
3-26 (Objective 3-1) A careful reading of an unqualified report indicates several important
phrases. Explain why each of the following phrases or clauses is used rather than the
alternative provided:
a. ‘‘The financial statements referred to above present fairly in all material respects the
financial position” rather than “The financial statements mentioned above are
correctly stated.’’
b. ‘‘In conformity with accounting principles generally accepted in the United States of
America” rather than “are properly stated to represent the true economic conditions.’’
c. ‘‘In our opinion, the financial statements present fairly” rather than “The financial
statements present fairly.’’
d. ‘‘Brown & Phillips, CPAs (firm name),” rather than “James E. Brown, CPA (individual
partner’s name).’’
e. ‘‘We conducted our audit in accordance with auditing standards generally accepted in
the United States of America” rather than “Our audit was performed to detect material
misstatements in the financial statements.’’
3-27 (Objectives 3-1, 3-2, 3-4, 3-6, 3-7) Allison, CPA, has completed the audit of the
financial statements of Optima Corporation as of and for the year ended December 31,
2007. Allison also audited and reported on the Optima financial statements for the prior
year. Allison drafted the following report for 2007.
We have audited the balance sheet and statements of income and retained earnings
of Optima Corporation as of December 31, 2007. We conducted our audit in
accordance with generally accepted accounting standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of misstatement.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly the
financial position of Optima Corporation as of December 31, 2007, and the results of
its operations for the year then ended in conformity with generally accepted auditing
standards, applied on a basis consistent with those of the preceding year.
Allison, CPA
(Signed)
Other Information
• Optima is presenting comparative financial statements.
• Optima does not wish to present a statement of cash flows for either year.
• During 2007, Optima changed its method of accounting for long-term construction
contracts and properly reflected the effect of the change in the current year’s financial
statements and restated the prior year’s statements. Allison is satisfied with Optima’s
justification for making the change. The change is discussed in footnote 12.
CHAPTER 3 / AUDIT REPORTS 69