Final answer:
A qualified opinion and modification of the opinion paragraph to reflect the asset capitalization issue is appropriate, while adding an explanatory paragraph is necessary to explain the effects. However, a phrase like "subject to the qualified act..." is incorrect in this context.
Step-by-step explanation:
If a client expensed the acquisition cost of some assets that should have been capitalized and depreciated over their useful lives, the first thing to consider is the impact on the financial statements. The incorrect treatment of these costs will lead to the understatement of assets and overstated expenses in the period the assets were purchased. To communicate this misrepresentation in the financial statements, auditors provide a modified opinion. As such:
- A qualified opinion could be appropriate if the impact is material but not pervasive. This indicates that, apart from the issue of capitalizing the acquisition costs of some assets, the financial statements are presented fairly.
- The opinion paragraph should indeed be modified to include language such as: "except for the effects of not capitalizing the acquisition costs of some assets..." to draw attention to the specific area of the financial statements affected by the misstatement.
- An explanatory paragraph should be added describing the nature of the qualification and, where practicable, quantifying its effect. This helps users of the financial statements understand the implication of the misstatement.
However, option d, which suggests that an explanatory paragraph should be modified to include language such as: "subject to the qualified act..." is incorrect. This phrasing implies the audit opinion is contingent upon a specific, uncertain future event, which is not the practice for qualified opinions regarding past transactions such as this asset capitalization issue.