The partner on the Cloud 9 audit, Jo Wadley, has reviewed the report to be used for communication with Cloud 9's management and audit committee and the draft management representation letter, both prepared by the audit manager Sharon Gallagher. Sharon briefed Jo on the major differences the partner will need to resolve with Cloud 9's management. Sometimes, meetings with clients at the end of the audit can be difficult. If a client's management will not adjust the financial statements to reflect misstatements found during the audit, the partner considers modifying the audit report. Jo does not anticipate any major difficulties with Cloud 9's management. Before the final meetings with Cloud 9's management and audit committee, the audit team will finalize the management representation letter and prepare the auditor's reports. Ian, a first-year associate, has learned a great deal about the process of conducting an audit by working on the Cloud 9 engagement. Based on his knowledge of the audit work completed, he feels confident that Cloud 9 will receive an unqualified report on the financial statements, but it will ultimately depend on the outcome of Jo's meetings with management and the audit committee. Ian remembers from his college auditing class that situations may happen in which auditors add another paragraph to the unqualified report or modify their opinion. Ian asks Sharon to refresh his memory on these situations. He asks her, "Do you think there will be any modifications to Cloud 9's audit report?" Sharon replies, "Let's do a quick review of situations that require a modification to the audit report." Sharon asks Ian if he thinks an emphasis-of-matter paragraph should be added to the audit report. Ian thinks for a moment, then replies, "Well, we confirmed with Cloud 9's lawyers that there are no pending legal issues, so there is nothing we need to emphasize in that area. Cloud 9 has a decline in earnings this year but that does not represent a going concern issue. There are no consistency issues with Cloud 9's application of accounting principles. So, I don't think we need to add an emphasis-of-matter paragraph to this year's audit report." "I agree with your analysis," replies Sharon. Sharon reminds Ian that Cloud 9 has some inventory production in Vietnam. Jo, the partner, decided to continue to use a Vietnam-based accounting firm to gather evidence on the inventory produced at the Vietnamese facility and the property, plant, and equipment located there. Jo was satisfied with the reputation of the firm, its past experience with auditing Cloud 9's Vietnamese facility, and its independence from the client. In addition, the inventory produced at the Vietnamese location represents 25% of Cloud 9's total inventory. The property, plant, and equipment represents 20% of Cloud 9's total PPE. Jo and Sharon reviewed the working papers of the Vietnamese firm and were satisfied with the work completed. No material misstatements were found regarding the inventory located at the Vietnamese facility. Since the inventory located at the Vietnamese facility is a material portion of Cloud 9's overall inventory, Jo has decided to reference the work of the Vietnamese accounting firm in the audit report. Sharon asks Ian if he remembers the types of modified opinions and if he thinks Cloud 9 should be issued a modified opinion. Ian thinks for a moment, then says, "I remember that if a company does not follow proper accounting procedures or if there are material misstatements that management will not adjust, then it cannot receive an unqualified opinion." "That's correct," says Sharon. "In those instances the auditor would choose from a qualified or an adverse opinion. The auditors would use their professional judgment in deciding if the accounting issues were material or pervasively material. If material, a qualified opinion would be appropriate. If pervasively material, then an adverse opinion would be issued." "I don't think we have those issues with Cloud 9, unless something unexpected comes up in Jo's meeting with management and the audit committee," says Ian. Sharon nods her head in agreement. Ian continues, "I also remember that if the auditors cannot complete their audit procedures, which means they cannot gather evidence to form an opinion on whether the client's financial statements are presented fairly, then the auditors cannot issue an unmodified opinion." "Right again," says Sharon. "We refer to that situation as a scope limitation. Again, the auditors would use their professional judgment in deciding if the scope limitation was material or pervasively material. If material, a qualified opinion would be appropriate. If pervasively material, then a disclaimer of opinion would be issued." "I remember," says Ian. "A disclaimer of opinion means the auditors do not give an opinion. That makes sense because if you can't perform your audit procedures, how can you form an opinion with nothing to base it on?" Sharon nods again in agreement. "I don't think we have any scope limitations on the Cloud 9 audit," Ian laughs. "There has been plenty of work for me to do!" Procedures to search for subsequent events at Cloud 9 have been documented in the audit program. Jo will once again formally ask management about any subsequent events in the final meeting before the end of fieldwork date, which is expected to be March 15, 2023. Cloud 9 expects to file its 10-K, which includes the financial statements and auditor's reports, on March 20, 2023. Sharon asks Ian, "Do you remember the significance of the date on the auditor's report?" "Yes, I do," replies Ian. "That is the date of the completion of fieldwork." "Very good," says Sharon. "That date marks the end of our responsibility period. However, if new information were to come to our attention after March 20 that affects information in the financial statements, we would speak to management about it. It doesn't happen very often, but in my experience, I have had a couple of situations that required us to perform some audit procedures after the end of fieldwork." Ian worked closely with Josh, the senior, during the testing of internal controls. The working papers for controls testing were reviewed by Sharon and Jo. Ian says to Sharon, "As for the opinion on the effectiveness of ICFR, I'm thinking we will issue an unqualified opinion for Cloud 9. I did a lot of the work on the controls testing and it seemed that Cloud 9's controls were working effectively. Our testing revealed what we believe is a significant deficiency over the period-end accrual in accounts payable. We have discussed this with management and the audit committee." "Yes, after reviewing the working papers for the controls testing, Jo and I agree with that assessment," says Sharon. "You've done a great job on the Cloud 9 audit, Ian, and I think you have gained a lot of valuable experience that will be useful on your future clients." Based on everything you know about the audit of Cloud 9, prepare the audit reports. Fieldwork was completed on March 15, 2023, and the 10-K will be filed with the SEC on March 20, 2023.