AC410 Unit 10 Qualified Audit Report Example

Except for the Warranty Reserve: A Unit 10 Qualified Audit Report for a Stair Lift Maker and the Reasons for Its Wording

[Student Name]

Purdue University Global

AC410: Auditing

Unit 10 Audit Report

[Instructor Name]

[Date]

Hallcroft Lifts, its owners and every figure are composite; the firm name, city and report date are left in brackets; the standards and textbook cited are real.

Independent Auditor's Report

To the Stockholders and Board of Directors of Hallcroft Lifts, Inc.

Qualified Opinion

We have audited the financial statements of Hallcroft Lifts, Inc.: the balance sheet at December 31, 2025, the statements of income, changes in stockholders' equity and cash flows for the year ended on that date, and the accompanying notes.

In our opinion, except for the effects of the warranty matter set out in the Basis for Qualified Opinion section below, these financial statements present fairly the financial position of Hallcroft Lifts, Inc. at December 31, 2025, in all material respects, and the results of its operations and its cash flows for the year then ending, in conformity with U.S. GAAP.

Basis for Qualified Opinion

Hallcroft Lifts, Inc. states its accrued warranty obligation at $1,010,000, which assumes that 2.1 percent of lifts under warranty will generate a claim each year. The Company's own claims history, including claims paid after year end, supports a rate of no less than 2.6 percent. In our opinion, the accrued warranty obligation should be at least $1,154,000 to conform with U.S. GAAP. Had it been so stated, accrued warranty obligations would have increased by $144,000, the deferred tax asset would have increased by $36,000, and net income and stockholders' equity would each have decreased by $108,000.

Our audit was conducted under auditing standards generally accepted in the United States (GAAS), and the section on the auditor's responsibilities below explains what those standards require of us. We must be independent of Hallcroft Lifts, Inc. and must fulfill the other ethical obligations that apply to this audit. In our judgment, the evidence we gathered is sufficient and appropriate to support the qualified opinion above.

Responsibilities of Management for the Financial Statements

Preparing these financial statements, and presenting them fairly under U.S. GAAP, is management's responsibility. That includes designing, putting in place and keeping up the internal control needed to prepare statements without material misstatement from fraud or error. Management must also assess whether conditions or events, taken together, raise substantial doubt that Hallcroft will remain a going concern for the year following the date its statements become available for issue.

Auditor's Responsibilities for the Audit of the Financial Statements

We aim to obtain reasonable assurance that the statements are free, as a whole, of material misstatement from fraud or error, and to issue a report containing our opinion. Reasonable assurance is high but falls short of absolute, so an audit under GAAS does not guarantee that every material misstatement will be found. Misstatements from fraud are harder to detect than those from error, because fraud can involve collusion, forgery, deliberate omission, false representation or management override of controls. We treat misstatements as material when a reasonable user's judgment would substantially likely be affected by them, alone or combined.

Throughout the audit we applied professional judgment and skepticism. We identified and assessed the risks of material misstatement and performed procedures in response; we obtained an understanding of internal control relevant to the audit so as to design those procedures, without expressing an opinion on the control's effectiveness; we evaluated the accounting policies used, the reasonableness of significant estimates and the overall presentation; and we concluded whether any conditions or events raise substantial doubt about whether the Company will remain a going concern for a reasonable period.

We must communicate with those charged with governance about, among other things, the planned scope and timing of the audit, significant findings and certain internal control matters we identified.

[Firm name] [City, State] [Report date]

Why the Opinion Is Qualified

The decision runs through two questions. First, is the statement set materially misstated? Yes. The uncorrected warranty difference of $144,000 before tax is larger than both the $96,000 overall threshold and the reserve's own $60,000 threshold. The only other uncorrected item on the summary, $11,600 of freight costs expensed in the wrong month, is clearly immaterial alone and does not change the picture in total. When management will not correct a material misstatement, the auditor must modify the opinion (American Institute of Certified Public Accountants, 2019).

Second, is the misstatement pervasive? It is not. It is confined to the accrued warranty obligation, warranty expense, the deferred tax asset and the totals that flow from them. It is 7.5 percent of normalized pretax income and 1.2 percent of stockholders' equity of $8,900,000. Revenue, receivables, inventory, the rebate accrual and cash flows are unaffected. A misstatement that is material but confined to identified elements earns a qualified opinion; one that is material and pervasive earns an adverse opinion (Arens et al., 2020).

An adverse opinion would tell the bank, the motor supplier and the departed brother that nothing in the statements could be trusted, which would be false; a qualified opinion tells them exactly which figure is wrong and by how much.

Why Not an Emphasis Paragraph

An emphasis-of-matter paragraph draws attention to something already presented and disclosed properly, such as an uncertainty or a subsequent event. It cannot repair a misstatement. Adding one about the warranty reserve while issuing an unmodified opinion would describe the issue and still say the statements are fairly presented, which the evidence does not support. A disclaimer would be wrong for a different reason: the team was not prevented from gathering evidence. The problem is what the evidence shows, not a lack of it.

Why the Wording Takes This Form

1. "Except for the effects of" is the phrase that limits the qualification to the matter described. It appears only in the opinion paragraph and the heading.

2. The basis section states the amounts. Where it is practicable, the effects of a misstatement on the statements should be quantified, and here they are known: the reserve, the deferred tax asset at the Company's 25 percent blended rate, net income and equity.

3. "At least $1,154,000" reflects that the team's range runs from $1,154,000 to $1,269,000 and the misstatement is measured to its nearest end. Claiming the point estimate of $1,211,000 would overstate what the evidence proves.

4. The responsibilities sections are unchanged from an unmodified report. The modification belongs in the opinion and basis sections, not scattered through the rest.

Communications Before the Report

The chief executive and the controller received the proposed adjustment and the evidence memo on February 18 and declined in writing on February 24, stating that they expect year-three claims to confirm the lower rate. The firm informed the board of the expected qualification before the report date, as the standard on communication with those charged with governance requires (American Institute of Certified Public Accountants, 2023), so the owners did not first learn of it from the signed report. The significant deficiency in the review of warranty assumptions was communicated separately in writing. Management's representation letter lists the uncorrected misstatement and states management's reasons for not recording it.

If Hallcroft Were a Public Company

An issuer's report would refer to PCAOB standards rather than GAAS, state the auditor's tenure, and for most issuers include critical audit matters, of which the warranty reserve would almost certainly be one. The structure of the qualification itself would be similar, though a qualified opinion on an issuer's statements is rare in practice because the SEC does not generally accept qualified opinions arising from departures from GAAP in registrant filings.

References

American Institute of Certified Public Accountants. (2019). Statement on Auditing Standards No. 134: Auditor reporting and amendments, including amendments addressing disclosures in the audit of financial statements. AICPA.

American Institute of Certified Public Accountants. (2023). AU-C section 260: The auditor's communication with those charged with governance. In AICPA professional standards. AICPA.

Arens, A. A., Elder, R. J., Beasley, M. S., & Hogan, C. E. (2020). Auditing and assurance services (17th ed.). Pearson.