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Chapter 12 Reports on Audited Financial Statements The television industry doesn’t like to see the complexity of the world. It prefers simple reporting, with simple ideas: this is white, that’s black; this is good, that’s bad. Filmmaker Krisztof Kieslowski 12-2

Reports Accompanying Financial Statements Prepared by Auditor –Opinion on financial statements and related disclosures: Are F/S presented per applicable financial reporting framework (GAAP)? –Opinion on internal control over financial reporting: Is I/C effective? Prepared by Management –Opinion on internal control over financial reporting: Is I/C effective? 12-3

Types of Auditors’ Reports 1.Standard report Expresses an unqualified opinion 2.Unqualified opinion with modified wording F/S are in conformity with GAAP Additional matters are disclosed in report 3.Qualified opinion “Except for” some matter, F/S are in conformity with GAAP 4.Adverse opinion F/S are not in conformity with GAAP 5.Disclaimer of opinion No opinion is issued by auditors 12-4

The Standard Report (Paragraphs) Introductory –F/S and years examined –Responsibility of auditors and management Scope –Audit conducted in accordance with PCAOB standards –Description of an audit (specific references to “test basis,” “materiality,” and “significant estimates”) –Audit provides reasonable assurance Opinion –Are F/S presented in conformity with applicable financial reporting framework (GAAP)? Internal Control –References examination, report, and opinion on internal control 12-5

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, 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 12-6

Departures from GAAP Issue either qualified opinion or adverse opinion, depending upon materiality and pervasiveness Opinion paragraph modifications –Qualified (“In our opinion, except for the matter discussed in the preceding paragraph,….”) –Adverse (“financial statements do not present fairly”) Add paragraph discussing departure and amounts 12-7

Scope Limitations Issue either qualified opinion or disclaimer, depending upon materiality and pervasiveness Type of scope limitation –Circumstance-imposed: Beyond auditors’ and client’s control –Client-imposed: Client specifically limits auditors’ procedures (more serious, disclaimer issued) 12-8

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”) 12-9

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 12-10

General Approach for Other Matters Issue unqualified opinion but add paragraph to report to discuss the matter –Emphasis-of-matter paragraphs provide information related to users’ understanding of F/S –Other-matter paragraphs provide information related to users’ understanding of audit, auditors’ responsibility, or auditors’ report Situations –Consistency –Going-concern –Rule 203 departures from GAAP –Division of responsibility –Emphasis of a matter 12-11

Division of Responsibility 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 12-12

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 12-13

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 12-14

Information Accompanying F/S Summary financial statements –Expand report on full F/S to provide conclusion on summary F/S (in relation to full F/S) Other information (includes President’s letter, MD&A, and other information) –“Exception-based” reporting –Consider whether any inconsistencies affect opinion on F/S Required supplementary information –Required to perform limited procedures –Expand report on F/S to discuss procedures and issues encountered with engagement or information (if any) –Disclaim an opinion on supplementary information 12-15

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 12-16