Topic 17: Completing the Audit ― Reporting

Topic 17: Completing the Audit ― Reporting Auditing Arens Ch. 3 James J. McKinney jmckinney@rhsmith.umd.edu

Audit Topics Through All Audit Phases Topic 1: Overview Topic 2: Accounting Information System Topic 18: Legal Liability Fraud Detection IT Auditing Other Engagements – NOT AUDITING! Planning Fieldwork Audit Completion Topic 17: Reporting (these topics affect fieldwork and completion) Topic 3: Cycles Topic 4: Management Assertions and Audit Objectives Topic 5: Evidence Topic 6: Materiality Topic 7: Audit Risk Topic 8: Test Types and Audit Plan Topic 9: Sampling in Tests of Controls and Substantive Tests of Transactions Topic 10: Tests of Controls Topic 11: Sampling in Tests of Details of Balances Topic 12: Sales and Collections Cycle Topic 13: Inventory and Warehousing Cycle Topic 14: Acquisition and Payment Cycle Topic 15: Cash Topic 16: Audit Completion Topic 17: Reporting

! Overview of a Financial Statement Audit Audit Work Papers Planning Fieldwork Audit Completion • Substantive Testing: • Substantive Tests of Transactions • Analytical Procedures • Tests of Details of Balances Test of Controls and Reassessment of Control Risk • Perform: • Pre-Acceptance Client Review • Understand Business • Business Risk • Initial Analytical Procedures • Engagement Letter • Preliminarily Determine and Assess: • Controls • Materiality • Audit Risk • Risk of Material Misstatement • Detection Risk • Determine audit procedures based on previous assessments and: • Management Assertions • Audit Objectives • Evidence Availability, Persuasiveness, and Cost • Prepare: • Audit Plan • Audit Program • Complete the Audit: • Contingent Liabilities • Subsequent Events • Reassess: • Risk • Materiality • Evidence • Final Analytical Procedures • Management Representation Letter • Issue: • Audit Report on Financial Statements • Audit Report on Internal Controls (issuers) • Management Letters (SAS 115) not usually analytical procedures Opening Balances Sampling

! US ASB-C Standard Unqualified Audit Report report title Independent Auditor's Report To the Board of Directors of ABC Company, Report on the Financial Statements We have audited the accompanying consolidated financial statements of ABC Company and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 201X and 201W, 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. 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 United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated 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 audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ABC Company and its subsidiaries as of December 31, 201X and 201W, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. /s/ Mary, Land & Terrapin, CPAs College Park, MD March 1, 201Y audit report addressee what is being audited scope end of fieldwork date US ASB AU–C 700.A58 Illustration 1

! PCAOB Unqualified Audit Report Example Report of IndependentRegistered Public Accounting Firm To the Board of Directors and Shareholdersof Marriott International, Inc.: We have audited the accompanying consolidated balance sheets of Marriott International, Inc. as of December 28, 2012 and December 30, 2011, and the related consolidated statements of income and comprehensive income, shareholders’ (deficit) equity and cash flows for each of the three fiscal years in the period ended December 28, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Marriott International, Inc. as of December 28, 2012 and December 30, 2011, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended December 28, 2012, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Marriott International, Inc.’s internal control over financial reporting as of December 28, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 20, 2013, expressed an unqualified opinion thereon. /s/ Ernst & Young LLP McLean, Virginia February 16, 2013 F/S and dates audited Auditor's and management's responsibility Why auditing. What Auditors did Opinion Internal Control Report Cross-Reference

! PCAOB Separate Report on Internal Controls Example Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of Marriott International, Inc.: We have audited Marriott International, Inc.’s internal control over financial reporting as of December 28, 2012 , based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Marriott International, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Marriott International, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 28, 2012 , based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Marriott International, Inc. as of December 28, 2012 and December 30, 2011, and the related consolidated statements of income, cash flows, comprehensive income and shareholders’ (deficit) equity for each of the three fiscal years in the period ended December 28, 2012, of Marriott International, Inc. and our report dated February 20, 2013 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP McLean, Virginia February 20, 2013 Introductory Scope Definition Inherent Limitations Opinion Cross-Reference • Sarbanes-Oxley Act • PCAOB Auditing standard 2 requires the audit of internal control to be integrated with the audit of the financial statements.

! PCAOB Combined Report on Internal Controls Example Report of Independent Registered Public Accounting Firm The Stockholders and Board of Directors, The Toro Company: We have audited the accompanying consolidated balance sheets of The Toro Company and subsidiaries as of October 31, 2013 and 2012 and the related consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended October 31, 2013. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule listed in Item 15(a) 2. We also have audited The Toro Company's internal control over financial reporting as of October 31, 2013 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Toro Company's management is responsible for these consolidated financial statements and the identified financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule and an opinion on the Company's internal control over financial reporting based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements and financial statement schedule included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Toro Company as of October 31, 2013 and 2012 and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the identified financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, The Toro Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2013 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. /s/ KPMG, LLP Minneapolis, Minnesota December 20, 2013

! Types of F/S Audit Reports (GAAS and PCAOB) • Unqualified or “Clean”: • Standard Report: All basic F/S are a fair representation and are in accordance with GAAP in all material respects and GAAS was applied. • There can be slight modifications to standard report and still be “clean” but NOT Standard: • Emphasis of a matter • Lack of consistency • OCBOA • Justified departures from GAAP • Reference to other auditors • Going concern • Adverse: • Material and pervasive departures from GAAP or not a fair representation of financial position. • Disclaimer: • Unable to form an opinion because: • The auditor is not independent • A material and pervasive scope limitation • A significant uncertainty • Qualified or “Except for”: • Fair representation except for: • Material but not pervasive departures from GAAP • Material but not pervasive material scope limitations.

Emphasis-of-Matter / Other-Matter Paragraphs • List of AU-C Sections Containing Requirements for Emphasis-of-Matter Paragraphs: • AU-C 560 Subsequent Events and Subsequently Discovered Facts • AU-C 570 The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern • AU-C 708 Consistency of Financial Statements • AU-C 800 Special Considerations—Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks • List of AU-C Sections Containing Requirements for Other-Matter Paragraphs: • AU-C 560 Subsequent Events and Subsequently Discovered Facts • AU-C 700, Forming an Opinion and Reporting on Financial Statements • AU-C 720, Other Information in Documents Containing Audited Financial Statements • AU-C 725, Supplementary Information in Relation to the Financial Statements as a Whole • AU-C 730, Required Supplementary Information • AU-C 800, Special Considerations—Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks • AU-C 806, Reporting on Compliance With Aspects of Contractual Agreements or Regulatory Requirements in Connection With Audited Financial Statements • AU-C 905, Alert That Restricts the Use of the Auditor's Written Communication US ASB AU–C 706.A14 and A15

! Unqualified Report With An Explanatory Paragraph Or Modified Wording: Emphasis of a Matter • Emphasis-of-Matter (general use) • A paragraph included in the auditor’s report that is required by GAAS, or is included at the auditor’s discretion, and that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s professional judgment, isof such importance that it is fundamental to users’ understanding of the financial statements. • When the auditor includes an emphasis-of-matter paragraph in the auditor’s report, the auditor should: • include it immediately after the opinion paragraph in the auditor’s report, • use the heading "Emphasis of Matter" or other appropriate heading, (AU-C) • include in the paragraph a clear reference to the matter being emphasized and to where relevant disclosures that fully describe the matter can be found in the financial statements, and • indicate that the auditor’s opinion is not modified with respect to the matter emphasized. (AU-C) US ASB AU–C 706.05 and .07 PCAOB Example Explanatory Paragraph (additional to standard paragraphs) Resulting from Sale of Controlling Interest (Same introductory, scope, and opinion paragraphs as the standard report) As discussed in Note 4 to the consolidated financial statements, on November 30, 2006, the Corporation sold a 51% controlling interest in GMAC LLC, its former wholly-owned finance subsidiary. The Corporation’s remaining interest in GMAC LLC is accounted for as an equity method investment. General Motors Corporation December 31, 2008 10-K AU-C Example Emphasis-of-Matter Paragraph Based on Subsequent Discovery of Facts (Same introductory, responsibilities, scope, and opinion paragraphs as the standard report) 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 Company's description in the note to the financial statements]. Our opinion is not modified with respect to this matter. US ASB AU–C 706.A13

! Unqualified Report With An Explanatory Paragraph Or Modified Wording: Lack of Consistency Changes that affect comparability but not consistency: Changes that affect consistency and require an explanatory paragraph if they are material: 1. Changes in accounting principles 2. Changes in reporting entities 3. Corrections of errors involving principles (PCAOB AS6.5 claims No. 3 is not a change) 1. Changes in an estimate 2. Error corrections not involving principles 3. Variations in format and presentation of financial information 4. Changes because of substantially different transactions or events Under US AU-C standards indicate that a Change in Accounting Principle should require an Emphasis-of-Matter paragraph AU-C 709.09 PCAOB Example Explanatory Paragraph (additional to standard paragraphs) Resulting from Lack of Consistency (Same introductory, scope, and opinion paragraphs as the standard report) As discussed in Note 3 to the consolidated financial statements, the Corporation: (1) effective January 1, 2008, adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements, (2) effective January 1, 2007, adopted the recognition and measurement provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, (3) effective January 1, 2007, changed the measurement date for defined benefit plan assets and liabilities to coincide with its year end to conform to Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R) (SFAS No. 158), and (4) effective December 31, 2006, began to recognize the funded status of its defined benefit plans in its consolidated balance sheets to conform to SFAS No. 158. (General Motors Corporation December 31, 2008 10-K) The Auditing Standards Board has issued a proposal to the PCAOB to eliminate the consistency explanatory paragraph.

! Unqualified Report With An Explanatory Paragraph Or Modified Wording: OCBOA Special purpose frame work.:A financial reporting framework other than GAAP that is one of the following bases of accounting: . . . Cash basis . . . Tax basis . . . Regulatory basis. . . Contractual basis. . . . The cash, tax, and regulatorybases of accounting are commonly referred to as other comprehensive bases of accounting. US ASB AU–C 800.07 AU-C Example Basis of Accounting Modification – Tax Basis Report on the Financial Statements fWehave audited the accompanying financial statements of ABC Partnership, which comprise the statements of assets, liabilities, and capital-income tax basis as of December31, 201X, and the related statements of revenue and expenses-income tax basis and of changes in partners’ capital accounts-income tax basis 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 financial statements in accordance with the basis of accounting the Partnership uses for income tax purposes; . . . Same Auditor’s Responsibility Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the assets, liabilities, and capital of ABC Partnership as of December31, 201X, and its revenue and expenses and changes in partners’ capital accounts for the year then ended in accordance with the basis of accounting the Partnership uses for income tax purposes described in Note X. Basis of Accounting We draw attention to Note X of the financial statements, which describes the basis of accounting. The financial statements are prepared on the basis of accounting the Partnership uses for income tax purposes, which is a basis of accounting other than accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. Modified US ASB AU–C 800.A35

! Unqualified Report With An Explanatory Paragraph Or Modified Wording: Justified departures from GAAP Auditor Agrees with a Departure from a Promulgated Principle The auditor must be satisfied and must state and explain, in a separate paragraph or paragraphs in the audit report, that adhering to the principle would have produced a misleading result in that situation. • “Rule 203 [ET section 203.01] was adopted to require compliance with accounting principles promulgated by the body designated by Council to establish such principles. There is a strong presumption that adherence to officially established accounting principles would in nearly all instances result in financial statements that are not misleading. • However, in the establishment of accounting principles it is difficult to anticipate all of the circumstances to which such principles might be applied. This rule therefore recognizes that upon occasion there may be unusual circumstances where the literal application of pronouncements on accounting principles would have the effect of rendering financial statements misleading. In such cases, the proper accounting treatment is that which will render the financial statements not misleading. • The question of what constitutes unusual circumstances as referred to in rule 203 [ET section 203.01] is a matter of professional judgment involving the ability to support the position that adherence to a promulgated principle would be regarded generally by reasonable persons as producing a misleading result. • Examples of events which may justify departures from a principle are new legislation or the evolution of a new form of business transaction. An unusual degree of materiality or the existence of conflicting industry practices are examples of circumstances which would not ordinarily be regarded as unusual in the context of rule 203 .” • Possible Example: Declaring a dividend prior to year-end which your client has always paid but your client is not required to pay.

! Unqualified Report With An Explanatory Paragraph or Modified Wording: Other Auditors • Reports Involving • Other Component • Auditors • Make no reference • in the audit report. • Make reference • in the report • (modified wording • report). • 3. Qualify the opinion. AU-C Example Report in Which the Auditor of the Group Financial Statements Is Making Reference to the Audit of the Financial Statements of a Component Prepared Using the Same Financial Reporting Framework as That Used for the Group Financial Statements and Performed by a Component Auditor in Accordance With GAAS (modified opinion paragraph and basis of opinion - same introductory mgmt. responsibility paragraphs as the standard report) Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of B Company, a wholly-owned subsidiary, which statements reflect total assets constituting 20 percent and 22 percent, respectively, of consolidated total assets at December 31, 201X and 201W, and total revenues constituting 18 percent and 20 percent, respectively, of consolidated total revenues for the years then ended. Those statements were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for B Company, is based solely on the report of the other auditors. 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 . . . Opinion In our opinion, based on our audit and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, . . .. • REFERENCE TO OTHER AUDITORS (shared opinions, multi-location corporations) • Must reference other auditors if: (indicates division of responsibility). • Material AND • Not taking responsibility • Only requires primary auditors signature. • Extended auditor responsibility • Do not mention others name unless including their report. • Modified opinion paragraphs. US ASB AU-C 600.A97

! Unqualified Report With An Explanatory Paragraph Or Modified Wording: Other Auditors • Comparative Financial Statements: (2 or more prior years). • When same CPA does all years: • If current year unqualified, pluralize, refer to prior years and include all dates. • If prior years were other than unqualified, add explanatory paragraph. • Change to new CPA: • Reference other auditors • If current year unqualified, pluralize, refer to prior years and include all dates. • Make clear that you are not responsible for prior years. • Opinions from prior years can be changed if new information becomes available, add explanatory paragraph. • Other Auditors Whose Work Cannot Be Relied Upon • If some what material, address reasons and qualify. • If material, disclaim. • Preceding two should happen rarely, since it signifies a lack of coordination.

! Unqualified Report With An Explanatory Paragraph Or Modified Wording: Going Concern Significant recurring operating losses or working capital deficiencies Inability of the company to pay its obligations as they come due Loss of major customers, the occurrence of uninsured catastrophes Legal proceedings, legislation that might jeopardize the entity’s ability to operate PCAOB Example Explanatory Paragraph (additional to standard paragraphs) Resulting from Substantial Doubt about Going Concern (Same introductory, scope, and opinion paragraphs as the standard report) The accompanying consolidated financial statements for the year ended December 31, 2008, have been prepared assuming that the Corporation will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Corporation’s recurring losses from operations, stockholders’ deficit, and inability to generate sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. (General Motors Corporation December 31, 2008 10-K) AU-C Example Emphasis-of-Matter Paragraph in the Auditor's Report Describing an Uncertainty About the Entity's Ability to Continue as a Going Concern for a Reasonable Period of Time (Same introductory, scope, and opinion paragraphs as the standard report) Emphasis of Matter The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note X to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note X. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Modified US ASB AU–C 570.13

! Types of F/S Audit Reports (GAAS and PCAOB) • Unqualified or “Clean”: • Standard Report: All basic F/S are a fair representation and are in accordance with GAAP in all material respects and GAAS was applied. • There can be slight modifications to standard report and still be “clean” but NOT Standard: • Emphasis on a matter • Lack of consistency • OCBOA • Justified departures from GAAP • Reference to other auditors • Going concern • Adverse: • Material and pervasive departures from GAAP or not a fair representation of financial position. • Disclaimer: • Unable to form an opinion because: • The auditor is not independent • A material and pervasive scope limitation • A significant uncertainty • Qualified or “Except for”: • Fair representation except for: • Material but not pervasive departures from GAAP • Material but not pervasive material scope limitations.

! Qualified Opinion: GAAP Departure PCAOB Example Departure from GAAP Qualified Opinion (Modified opinion standard report paragraph - same introductory and scope paragraphs as the standard report) The Company has excluded, from property and debt in the accompanying balance sheets, certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. If these lease obligations were capitalized, property would be increased by $_______ and $_______, long-term debt by $_______ and $_______, and retained earnings by $_______ and $_______ as of December 31, 201X and 201W, respectively. Additionally, net income would be increased (decreased) by $_______ and $_______ and earnings per share would be increased (decreased) by $_______ and $_______, respectively, for the years then ended. In our opinion, except for the effects of not capitalizing certain lease obligations as discussed in the preceding paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of X Company as of December 31, 201X and 201W, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. PCAOB Interim Auditing Standards, AU 508.39 AU-C Example Departure from GAAP Qualified Opinion (modified opinion paragraph and basis of opinion - same introductory mgmt. responsibility paragraphs as the standard report) Auditor’s Responsibility . . .We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for ourqualified 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, 201X and 201W, respectively. Accordingly, cost of sales would have been 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, 201X and 201W, 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, 201X and 201W, 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. US ASB AU-C 705.A32 • If immaterial departure from GAAP then unqualified opinion

! Qualified Opinions: Inadequate Disclosure PCAOB Example Lack of Disclosure Qualified Opinion (Modified opinion standard report paragraph - same introductory and scope paragraphs as the standard report) The Company’s consolidated financial statements as of March 31, 2008 and for the year then ended do not disclose segment reporting information required by ASC 280. In our opinion, disclosure of segment reporting information is required by U.S. generally accepted accounting principles. In our opinion, except for the omission of segment reporting information discussed in the preceding paragraph, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hitachi, Ltd. and subsidiaries at March 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2010, in conformity with U.S. generally accepted accounting principles. Also, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. (Hitachi, Ltd. March 31, 2010 20-F) AU-C Example Departure from GAAP Qualified Opinion (modified opinion paragraph and basis of opinion - same introductory mgmt. responsibility paragraphs as the standard report) Auditor’s Responsibility . . .We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for ourqualified 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, 201X and 201W, 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. US ASB AU-C 705.A32

! Qualified Opinion: Scope Limitation PCAOB Example Scope Limitation Qualified Opinion (Modified scope and opinion standard report paragraphs) REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM To the Shareholders of Fresh Made Dairy, Inc. We have audited the accompanying balance sheet of Fresh Made Dairy, Inc as of December 31, 2008 and the related statements of income, stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. Except as discussed in the following paragraph, we conducted our audit 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 of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. We were not able to make, or observe, physical inventory counts at December 31, 2008 and 2007 because we were not engaged as auditors until after December 31, 2008, and we have not been able to otherwise satisfy ourselves as to the inventory balances at those dates by other auditing procedures. The reported inventory balance was $471,477 and $590,464 at December 31, 2008 and 2007, respectively. In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to examine evidence regarding inventory, the financial statements referred to in the first paragraph above present fairly, in all material respects, the financial position of Fresh Made Dairy, Inc. as of December 31, 2008, and the results of operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Plante & Moran, PLLC Grand Rapids, MI April 29, 2009 (Fresh Made Dairy December 31, 2008 10-K)

! Qualified Opinions: Scope Limitation AU-C Example Scope Limitation GAAP Qualified Opinion (modified opinion paragraph and basis of opinion - same introductory mgmt. responsibility paragraphs as the standard report) Auditor’s Responsibility . . .We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for ourqualified audit opinion. Basis for Qualified Opinion ABC Company's investment in XYZ Company, a foreign affiliate acquired during the year and accounted for under the equity method, is carried at $XXX on the balance sheet at December 31, 201X, and ABC Company's share of XYZ Company's net income of $XXX is included in ABC Company's net income for the year then ended. We were unable to obtain sufficient appropriate audit evidence about the carrying amount of ABC Company's investment in XYZ Company as of December 31, 201X and ABC Company's share of XYZ Company's net income for the year then ended because we were denied access to the financial information, management, and the auditors of XYZ Company. Consequently, we were unable to determine whether any adjustments to these amounts were necessary. Qualified Opinion In our opinion, except for the possible 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, 201X and 201W, 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. US ASB AU-C 705.A32

! Adverse Opinion: GAAP Departure PCAOB Example Departure from GAAP Adverse Opinion – SEC Would Never Accept (Modified opinion standard report paragraph - same introductory and scope paragraphs as the standard report) As discussed in Note X to the financial statements, the Company carries its property, plant and equipment accounts at appraisal values, and provides depreciation on the basis of such values. Further, the Company does not provide for income taxes with respect to differences between financial income and taxable income arising because of the use, for income tax purposes, of the installment method of reporting gross profit from certain types of sales. Accounting principles generally accepted in the United States of America require that property, plant and equipment be stated at an amount not in excess of cost, reduced by depreciation based on such amount, and that deferred income taxes be provided. Because of the departures from accounting principles generally accepted in the United States of America identified above, as of December 31, 201X and 201W, inventories have been increased $_______and $_______by inclusion in manufacturing overhead of depreciation in excess of that based on cost; property, plant and equipment, less accumulated depreciation, is carried at $_______ and $_______ in excess of an amount based on the cost to the Company; and deferred income taxes of $_______ and $_______ have not been recorded; resulting in an increase of $_______ and $_______ in retained earnings and in appraisal surplus of $_______ and $_______, respectively. For the years ended December 31, 201X and 201W, cost of goods sold has been increased $_______ and $_______, respectively, because of the effects of the depreciation accounting referred to above and deferred income taxes of $_______ and $_______ have not been provided, resulting in an increase in net income of $_______ and $_______, respectively. In our opinion, because of the effects of the matters discussed in the preceding paragraphs, the financial statements referred to above do not present fairly, in conformity with accounting principles generally accepted in the United States of America, the financial position of X Company as of December 31, 201X and 201W, or the results of its operations or its cash flows for the years then ended. PCAOB Interim Auditing Standards, AU 508.60

! Adverse Opinion: GAAP Departure AU-C Adverse Opinion Due to a Material Misstatement of the Financial Statements (modified opinion paragraph and basis of opinion - same introductory mgmt. responsibility paragraphs as the standard report) Auditor’s Responsibility . . .We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for ouradverse audit opinion. Basis for Adverse Opinion As described in Note X, the Company has not consolidated the financial statements of subsidiary XYZ Company that it acquired during 201X because it has not yet been able to ascertain the fair values 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 XYZ 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 as of December 31, 201X and 201W, 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. US ASB AU-C 705.A32

! Disclaimer Report: Independence

! Disclaimer Report: Scope Limitation • Scope Limitation: • Not granted full access or unsatisfactory access to financial records • May be client imposed - withholding information or not allowing you to confirm. • May be circumstance imposed - hired in middle of year and cannot verify beginning inventory or flood or hurricane (e.g. Hugo) destroyed records. • Alternative measures may be used and need not lead to disclosure. • If some what material, issue qualified opinion: discuss $ amounts & potential effects • If highly material, disclaim: no scope paragraph PCAOB Example Disclaimer Report (Modified introductory and opinion standard report paragraphs – no scope paragraph) We were engaged . . . (rest of introductory paragraph is the same) [Second paragraph of standard report should be omitted] The Company did not make a count of its physical inventory in 201X or 201W, stated in the accompanying financial statements at $_______ as of December 31, 201X, and at $________ as of December 31, 201W. Further, evidence supporting the cost of property and equipment acquired prior to December 31, 201W, is no longer available. The Company's records do not permit the application of other auditing procedures to inventories or property and equipment. Since the Company did not take physical inventories and we were not able to apply other auditing procedures to satisfy ourselves as to inventory quantities and the cost of property and equipment, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on these financial statements. PCAOB Interim Auditing Standards, modified version of AU §508.63

! Disclaimer Report: Scope Limitation AU-C Adverse Opinion Due to a Material Misstatement of the Financial Statements (modified introductory, opinion paragraph and basis of opinion - same mgmt. responsibility paragraph as the standard report) Report on the Financial Statements We were engaged to audit the accompanying financial statements of ABC Company . . . Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on conducting the audit in accordance with auditing standards generally accepted in the United States of America. Because of the matter described in the Basis for Disclaimer of Opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Basis for Disclaimer of Opinion The Company's investment in XYZ Company, a joint venture, is carried at $XXX on the Company's balance sheet, which represents over 90 percent of the Company's net assets as of December 31, 201X. We were not allowed access to the management and the auditors of XYZ Company. As a result, we were unable to determine whether any adjustments were necessary relating to the Company's proportional share of XYZ Company's assets that it controls jointly, its proportional share of XYZ Company's liabilities for which it is jointly responsible, its proportional share of XYZ Company's income and expenses for the year, and the elements making up the statements of changes in stockholders' equity and cash flows. Disclaimer of Opinion Because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on these financial statements.. US ASB AU-C 705.A32

Topic 17: Completing the Audit ― Reporting