Professor Adams' Lecture Materials

Learning Objective 12-02: Identify situations in which language in the standard (unmodified) report is modified and the type of opinion issued in those situations.

Issued when departure is material, yet not pervasive.

Change title of Opinion section to Qualified Opinion.
- Indicate that “In our opinion, except for the matter described in the Basis for Qualified Opinion section of our report,. . . .”).
Change title of Basis for Opinion section to Basis for Qualified Opinion.
- Add paragraph explaining departure and detailing $ amounts involved.
- Reference qualified opinion in last sentence of section.

Issued when F/S do not present fairly according to GAAP (that is, a serious, pervasive departure from GAAP).

Report Modifications:

Change title of Opinion section to Adverse Opinion.
- Indicate that “In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion section of our report, the accompanying financial statements do not present fairly . . . ”
- Omit reference to “all material respects”.
Change title of Basis for Opinion section to Basis for Adverse Opinion.
- Add paragraph explaining departure and detailing $ amounts involved.
- Reference adverse opinion in last sentence of section.

Circumstance-Imposed

Situation in which matters beyond auditors’ and client’s control limit procedures performed by auditors
Example: inability to observe year-end inventory because of late appointment

Client-Imposed

Situation in which client specifically limits auditors’ procedures.
Should be viewed as a significant restriction and a disclaimer is ordinarily issued.

Issued when scope limitations are material, but not pervasive

Report Modifications:

Change title of Opinion section to Qualified Opinion
- Indicate that “In our opinion, except for the matter described in the Basis for Qualified Opinion section of our report,. . . .”.
Change title of Basis for Opinion section to Basis for Qualified Opinion.
- Add paragraph explaining scope limitation and detailing $ amounts involved.
- Reference qualified opinion in last sentence of section.

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:

Change title of Opinion section to Disclaimer of Opinion.
- Modify first sentence to indicate that “We were engaged to audit”.
- Modify opinion to indicate that “We do not express an opinion . . .”.
Change title of Basis for Opinion section to Basis for Disclaimer of Opinion.
- Add paragraph explaining scope limitation and detailing $ amounts involved .
- Delete paragraph indicating a G A A S audit has been performed.
Auditor’s Responsibilities for the Audit of the Financial Statements section.
- Reference inability to obtain sufficient appropriate audit evidence.
- Delete description of components of G A A S audit.
- Indicate requirement to be independent and meet other ethical responsibilities (moved from Basis for Opinion section).

Group financial statements: Financial statements comprised of more than one division/subsidiary/segment/component.
Group auditors: Conduct audit of material portion of the entity.
Component auditors: May be engaged by group auditors to audit divisions, subsidiaries, or components.

Group auditors should

Options

Take responsibility for work: Standard (unmodified) report.
Name component auditors.
- Present report of component auditors, only with their permission.
Refer to component auditors in Opinion section.
- Note that opinion is based (in part) on report of component auditors.
- Identify components examined by component auditors.
- Still express unmodified opinion, if appropriate.

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