1. Chapter 12 Auditors’ Reports The very existence of the accounting profession depends on public confidence in the determination of certified public accountants to safeguard the public interest. J.L Carey (Professional Ethics of Public Accounting)

2. Reports on Audited Financial Statements In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Enron Corp. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations, cash flows, and changes in shareholders’ equity for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. The opinion paragraph from Arthur Andersen’s final audit of Enron Corp. (dated February 23, 2001) 12-2

3. Audit Report Providing an independent and expert opinion on the fairness of financial statements When performing an audit, the auditors obtain reasonable assurance that the statements are in conformity with GAAP

4. Typical Coverage of Audit Reports Financial Statements Balance Sheet Income Statement Statement of Cash Flows Statement of Retained Earnings (equity) Financial Statement Disclosures The notes to the financial statements are considered an integral part of the financial statements

5. Reports Accompanying Financial Statements Report on financial statements and related disclosures (prepared by auditor) Are financial statements and disclosures according to GAAP? Report on internal control over financial reporting (prepared by management) Has company maintained effective internal control over financial reporting? Report on internal control over financial reporting (prepared by auditor) Is management’s assessment of its internal control appropriate? Has company maintained effective internal control over financial reporting?

6. Types of Auditors’ Reports Unqualified Report Expresses an unqualified opinion Unqualified Opinion with Modified Wording F/S are in conformity with GAAP Additional matters are disclosed in report Qualified Opinion “Except for” some matter, F/S are in conformity with GAAP Adverse Opinion F/S are not in conformity with GAAP Disclaimer of Opinion No opinion is issued by auditors 12-6

7. STANDARD (“CLEAN”) Audit Report Introductory Paragraph F/S included and years examined Responsibility of auditor Management responsibility Scope Paragraph Audit conducted in accordance with PCAOB standards Description of an audit --- specific references to “test basis,” “materiality,” and “significant estimates” Audit provides reasonable basis for opinion Opinion Paragraph – “fairly presented, in all material respects, in accordance with U.S. generally accepting accounting principles.” Internal Control References examination, report, and opinion on internal control

8. Conditions Required for Issuance of an Unqualified Report Independence of Mental Attitude Evidence Available, No Scope Limitations Followed GAAP Consistent Application of GAAP Disclosures are Adequate and Complete Expression of Opinion No Going Concern Problem

9. Independent Auditors’ Report (AS 5) Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders DUNDER-MIFFLIN, INC. We have audited the accompanying balance sheets of DUNDER-MIFFLIN, INC. as of December 31, 2012 and 2011, and the related statements of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012. These financial statements are the responsibility of DUNDER- MIFFLIN, INC.'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 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 audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of DUNDER-MIFFLIN, INC. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), DUNDER-MIFFLIN, INC.’S internal control over financial reporting as of December 31, 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 January 29, 2012 expressed an unqualified opinion thereon. Michael Scarn, LLP Scranton, PA January 29, 2013 Report Title Report Address Introductory Paragraph Scope Paragraph Opinion Paragraph Signature Report Date Internal Control Paragraph 12-9

10. Reports on Internal Control Options Separate reports on F/S and I/C, with each reports referencing the other Combined report on F/S and I/C 12-10

11. Reports on Internal Control Over Financial Reporting Identification of management's conclusion about effectiveness of company's internal control over financial reporting. Responsibilities of auditor and management for internal control Definition of the scope of the engagement. Definition of internal control over financial reporting. Identification of inherent limitations of internal control Opinions on: Whether management’s assessment is fairly stated. Whether company has maintained effective internal control over financial reporting. Reference to auditor's report on financial statements, including the type of opinion expressed.

12. Explanatory Language Added to the Standard Unqualified Financial Statement Audit Report Opinion based in part on the report of another auditor. Going Concern. Lack of Consistency.Emphasis of a Matter. Agreement with a Departure from GAAP.

13. Other Issues Affecting the Auditor’s Report Reference to Other Auditors Circumstances Concerning Comparative Financial Statements Previous year audited by other auditors First year audit Reporting on Other Information accompanying the financial statements

14. Division of Responsibility Group Financial Statements: Financial statements comprised of more than one division/subsidiary/segment/component Group Auditors: Conduct audit of material portion of the entity Component Auditors: May be engaged by group auditors to audit divisions, subsidiaries, or components 12-14

15. Division of Responsibility Obtain permission and present component auditors’ report Standard Report (Unqualified Opinion) YES Indicate Division of Responsibility in Unqualified Opinion NO Take Responsibility for Component Auditors’ Work? Refer to Component Auditors by Name? YES 12-15

16. Effect on Report Group auditors should Verify component auditors’ reputation and independence Communicate and coordinate with component auditors Options Take responsibility for work: Standard report Name component auditors Present report of component auditors, only with their permission Refer to component auditors Modify introductory, scope, and opinion paragraphs of report Still express unqualified opinion, if appropriate 12-16

17. Comparative F/S Continuing Auditors Update opinion by considering if previously-issued opinions still appropriate If previously-issued opinions not appropriate, revise opinion in current report Predecessor Auditors With permission, auditors may present reissued report from predecessor on prior-years’ F/S along with their report on current F/S If predecessors’ report not presented, auditors’ report must reference predecessors’ report and opinion on prior-years’ F/S 12-17

18. Report by a Predecessor Auditor Before reissuing the report: predecessor auditor should: 1.Read the financial statements of the current period. 2.Compare the prior-period financial statements reported on with the current- year financial statements. 3.Obtain a letter of representation from the current-year or successor auditor.

19. Other Information Accompanying The Financial Statements Provided by the Company --- Review, make sure that it is consistent with F/S Supplemental information required by FASB/GASB Exception based (similar to consistency) Information contained in an AUDITOR SUBMITTED document Typing or reproducing Financial Statements Presenting Financial Statements to third parties Attach report stating relationship with the submitted document

20. Emphasis of Matter Paragraph—Substantial Doubt as to Going Concern Status The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered negative cash flows from operations and has an accumulated deficient, conditions that raise substantial doubt about the Company's ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated fanatical statements n do not include any adjustments that might result from the outcome of this uncertainly. Our opinion is not modified with respect to this matter. NOTE: Ordinarily an unmodified opinion with an emphasis of matter paragraph is issued. Alternatively, a disclaimer of opinion may be issued.

21. Lack of Consistency Change in Accounting Principle Change in Reporting Entity Correction of an Error in Principle Changes Affecting Consistency Change in Accounting Estimate Correction of an error that does not involve an accounting principle Changes Not Affecting Consistency Change in Classification and Reclassificatio n Change expected to have a material future effect

22. Consistency Relates to: Change in accounting principles Adjustments to correct misstatements in previously-issued F/S Type of changes in accounting principles: Accounting principles (GAAP to GAAP) Form of reporting entity Accounting principles (non-GAAP to GAAP) Accounting principle inseparable from changes in estimates 12-22

23. Consistency: Effect on Report Add explanatory paragraph following the opinion paragraph May issue a qualified opinion (GAAP departure) if: Change is not justified Change is not accounted for in conformity with GAAP 12-23

24. Emphasis of Matter Paragraph Lack of Consistency A lack of consistent application of accounting principles results in an emphasis of matter paragraph, such as: As discussed in Note 5 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards Update No. XXX (provide title) as of December 31, 20X8. Our opinion is not modified with respect to this matter.

25. Emphasis of a Matter Explanatory paragraph after opinion paragraph discussing the matter (e.g., a subsequent event not affecting year-end F/S's) Usually items that are difficult to disclose in the financial statements Non-Quantitative Matters Subsequent Events

26. Additional Emphasis of Matter Situations—Auditor Discretionary A risk or uncertainty. Significant related party transactions described in a note to the financial statements. The company is a component of a larger business enterprise. Unusually important significant events. Accounting matters affecting comparability (other than changes in accounting principles) of financial statements with those of the preceding year.

27. Rule 203 Report Allows for non-GAAP solutions to fairly present the company's financial situation. Rule 203 of the AICPA Code of Professional Conduct --- recognizes that adherence to certain accounting principles may create situations in which a company's financial condition may not be fairly presented. Solution: Insert an additional middle paragraph (between scope and opinion paragraphs) stating the deviation from GAAP, but still issue an unqualified report.

28. Auditor Agrees with a Departure from Promulgated Accounting Principles In unusual circumstances financial statements may be misleading if a promulgated accounting principle was followed. Rule 203 of the Code of Professional Conduct allows the auditor, in such circumstances, to issue an unqualified opinion. An explanatory paragraph should describe the departure, the approximate effects of the departure, if practicable, and the reasons that compliance with the accounting principle results in misleading financial statements.

29. Modifications of the Auditors’ Report-- Unqualified Opinions

30. Departures from an Unqualified Financial Statement Audit Report Qualified “except for” Disclaimer Adverse

31. Qualified Opinion Issued when departure is material, yet not pervasive Report Modifications: Introductory and scope paragraphs remain the same Add paragraph preceding the opinion paragraph explaining departure and detailing $ amounts involved Modify opinion paragraph (“In our opinion, except for the matter discussed in the preceding paragraph,….”) 12-31

32. Conditions for Departure Scope Limitation Departure from GAAP Lack of Auditor Independence

33. Conditions Requiring Other Types of Financial Statement Audit Reports Scope Limitation Not in Conformity with GAAP Auditor Not Independent Results from an inability to obtain sufficient competent evidence about some component of the financial statements. Results when financial statements are materially affected by an unacceptable departure from GAAP. Results when auditor is not independent.

34. Scope Limitations Standard Report (Unqualified Opinion) Qualified Opinion Disclaimer of Opinion NO YES Alternative Procedures Available? Is the Limitation Pervasive? Is the Limitation Material? YES NO Standard Report (Unqualified Opinion) YES NO 12-34

35. Type of Scope Limitations Circumstance-Imposed Situation in which matters beyond auditors’ and client’s control limit procedures performed by auditor Example: inability to observe year-end inventory because of late appointment Client-Imposed Situation in which client specifically limits auditors’ procedures Should be viewed as a significant restriction and a disclaimer is ordinarily issued 12-35

36. Scope Limitation: Qualified Opinion Issued when scope limitations are material, but not pervasive Report Modifications: Introductory paragraph remains the same Scope paragraph: “Except as discussed in the following paragraph [the scope limitation], we conducted our audit…” Add paragraph preceding the opinion paragraph describing the scope limitation Modify opinion paragraph (“In our opinion, except for”) 12-36

37. GAAP Departures

38. Qualified (“Except for...”) Opinions Scope limitations can cause disclaimers or qualified opinions depending upon severity and materiality. Key question: Is the scope limitation limited, or does it permeate the financial statements? If alternative procedures are available, the auditor may still be able to issue an unqualified opinion. Report Modifications: Intro paragraph remain the same Scope paragraph: “Except for the problem noted, the audit was conducted in accordance with auditing standards generally accepted in the United States”. Add middle paragraph explaining problem Change opinion paragraph (“In our opinion, except for the matter discussed in the preceding paragraph,….”)

39. GAAS Departures

40. Modifications of Auditors’ Report— Qualified Opinions Type of ReportIntroductory or Scope Paragraph Explanatory Paragraph Opinion Paragraph Qualified—GAAP Departure None Describe Departure and Effects “except for the effects of the departure the financial statements…” Qualified—Scope Limitation “Except as explained in the following paragraph…” Describe Scope Limitation “except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to…”

41. Adverse Opinion Issued when F/S do not present fairly according to GAAP (i.e., a serious, pervasive departure from GAAP). Report Modifications: Introductory and scope paragraphs remain the same Add paragraph preceding the opinion paragraph explaining the departure and detailing $ amounts involved Change opinion paragraph (“financial statements do not present fairly”) 12-41

42. Disclaimer of Opinion Issued when the auditor is unable to be satisfied that the overall financial statements are fairly presented.

43. Reasons for Disclaimer Uncertainities Scope Limitation Going Concern Unaudited Review Compliation Agreed Upon Other Procedures Not Independent

44. Scope Limitation: Disclaimer of Opinion Pervasive scope limitation, usually client-imposed Significance of the limitation is such that auditors cannot gather sufficient appropriate evidence to form an opinion Report Modifications: Introductory paragraph: (“We were engaged to audit ….”; omit auditors’ responsibility) Omit scope paragraph Add paragraph preceding the opinion paragraph describing the scope limitation Modify opinion paragraph (“…we do not express an opinion….”) May still issue opinion on internal control if no scope limitation on the examination of internal control 12-44

45. Lack of Independence Scenario: Auditors begin engagement but independence subsequently compromised Report Single paragraph Indicates auditors are not independent Does not indicate why independence lacking 12-45

46. Reporting CPA is NOT Independent Should state that CPA is not independent but need not state the reason why I am (We are) not independent with respect to the XYZ Company and the accompanying balance sheet as of December 31, 20XX, and the related statements of income retained earnings, and cash flows for the year then ended were not audited by me (us) and, accordingly, I (we) do not express and opinion on them. No heading on report Do not describe procedures performed Must describe material departures from GAAP

47. Modifications of the Auditors’ Report-- Adverse & Disclaimer

48. Summary of Appropriate Auditors’ Reports

49. Placement of Explanatory Paragraphs Before Opinion Paragraph Qualified opinions Disclaimers Adverse opinions Following Opinion Paragraph Consistency Substantial doubt about continued existence Other types of paragraphs may precede or follow the opinion paragraph

50. Special Reports Financial Statements prepared on a Comprehensive Basis of Accounting other than GAAP Specified Elements, Accounts, or Items of Financial Statement Compliance with Contractual Agreements or Regulatory Requirements

51. Financial Statements Prepared on a Comprehensive Basis of Accounting Other Than GAAP Regulatory Basis Tax Basis Cash (or Modified Cash) Basis A Definite Set of Criteria Having Substantial Support

52. In some situations an auditor may be engaged to audit only part (or specified elements, accounts, or items) of the financial statements. Specific Elements, Accounts, or Items of a Financial Statement GAAP Other comprehensive basis of accounting (OCBOA) Basis of accounting prescribed by a contract or agreement Basis of Accounting

53. Prospective Financial Statements Forecasts and Projections Use of Prospective Financial Statements Types of Engagements Examination of Prospective Financial Statements

54. Audit is limited to certain specific audit procedures. Agreed-Upon Procedures Engagements Referred to as procedures and findings engagements. The SASs deal with financial statement items, whereas the SSAEs deal with nonfinancial statement subject matter.

55. Standards for compilations and reviews of financial statements are called... Review and Compilation Services

56. Association with Unaudited F/S Auditors permit use of name in communication including F/S Issue disclaimer of opinion (one paragraph) Do not mention auditing procedures performed Must identify any known departures from GAAP in the report Should cover all unaudited prior-years’ financial statements 12-56

57. Types of Engagements and Related Reports ExaminationReviewAgreed-Upon Procedures ProceduresExtensiveSignificantVaryingHighModerateVaryingPositiveNegativeFindingsGeneralGeneralLimited Type of Engagement Amount of Evidence Level of Assurance Form of ConclusionDistribution

58. Reporting Summary OpinionParagraphs modified/added MaterialPervasiveIntroScopeOpinionAdd’l Departure from GAAPQualifiedAdverse XX Scope LimitationQualifiedDisclaimerXXX Other matters (Consistency, Going-concern, Rule 203, Emphasis of a matter) Unqualified X Other matters (Division of responsibility when referencing work of component auditors) Unqualified XXX May issue disclaimer if: Lack of independence Associated with financial statements Material and pervasive going-concern uncertainty 12-58