The auditor evaluates the evidence and financial statements before selecting an opinion. A departure, a disclosed uncertainty and a change in accounting principle have different reporting consequences.
The factors an auditor should consider before signing support a conclusion: whether reasonable assurance has been obtained that the financial statements as a whole are free from material misstatement, whether due to fraud or error.
The auditor evaluates the following before forming the opinion:
- Sufficient appropriate audit evidence has been obtained, and no unresolved scope restriction remains.
- Uncorrected misstatements, individually and in the aggregate, are immaterial, judged by size and by qualitative effect.
- The applicable financial reporting framework is acceptable and its requirements have been met.
- Significant accounting policies are appropriate, consistently applied and adequately disclosed.
- Accounting estimates are reasonable, and the pattern of estimates shows no management bias.
- The information presented is relevant, reliable, comparable and understandable, and the disclosures are adequate.
- The terminology used, including the title of each statement, is appropriate.
Common mistakes
- Scope limitation ends in adverse. Insufficient evidence produces a qualified opinion when not pervasive and a disclaimer when pervasive; adverse belongs to a pervasive misstatement. A client's refusal to permit inventory observation is a scope limitation, not a departure.
- Paragraph used to cure an omission. An omitted material disclosure requires a qualified or adverse opinion according to pervasiveness. An emphasis-of-matter paragraph cannot cure it. An immaterial disclosure omission alone does not require opinion modification.
- Going concern labeled emphasis-of-matter. In the nonissuer report substantial doubt gets its own separate section; in the issuer report it is an explanatory paragraph that must use the words substantial doubt and going concern.
Bottom line
- Cause first, pervasiveness second: a misstatement gives qualified or adverse; a scope limitation gives qualified or disclaimer; never adverse for scope and never disclaimer for misstatement.
- The nonissuer report opens with Opinion, then Basis for Opinion, a going-concern section only when substantial doubt exists, key audit matters only when engaged, then the two responsibility sections; the clean opinion is unmodified.
- The issuer report is titled Report of Independent Registered Public Accounting Firm, its clean opinion is unqualified, it states independence under SEC and PCAOB rules, reports critical audit matters (the matter, the principal considerations, how it was addressed, the related...
- Emphasis-of-matter highlights an appropriately presented or disclosed matter fundamental to understanding the statements and does not modify the opinion. It is required for qualifying material principle changes and generally for special-purpose frameworks, subject to the general-use regulatory exception.
Exam shortcut
Test alternative procedures and materiality before choosing a modification. Established departures use effects; unresolved evidence limitations use possible effects. Assess pervasiveness from the presentation, including fundamental disclosures, rather than an account count. For ICFR, a material weakness means adverse and an opinion-preventing scope limitation means disclaimer or withdrawal.
The full lesson (about 7,972 words, 53 min read) adds 3 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- IV.A1
Browse all free CPA AUD lessons or jump into free CPA AUD practice questions.