Audit Report Types and Modifications
Understanding audit report types is one of the most heavily tested areas on the AUD section of the CPA exam. Auditors must select the correct opinion type based on the nature and materiality of misstatements or scope limitations. This cheat sheet covers all four opinion types under both AICPA (AU-C) and PCAOB (AS) standards.
The Four Audit Opinion Types
| Opinion Type | When Issued | Effect on Report |
|---|
| Unmodified (Clean) | Financial statements are fairly stated in all material respects | Standard report language; no modifications to the opinion paragraph |
| Qualified | Material but not pervasive misstatement OR scope limitation | "Except for" language in the opinion paragraph; Basis for Qualified Opinion paragraph added |
| Adverse | Material AND pervasive misstatement (statements are materially misstated) | Opinion states financial statements are NOT fairly presented; Basis for Adverse Opinion paragraph added |
| Disclaimer | Material AND pervasive scope limitation (auditor cannot obtain sufficient evidence) | Auditor does NOT express an opinion; Basis for Disclaimer paragraph added; scope paragraph modified |
Decision Matrix: Selecting the Opinion Type
| Issue Type | Material but Not Pervasive | Material AND Pervasive |
|---|
| Misstatement (departure from GAAP) | Qualified Opinion | Adverse Opinion |
| Scope Limitation (inability to obtain evidence) | Qualified Opinion | Disclaimer of Opinion |
Key Definitions
- Material: A misstatement is material if it could reasonably influence the economic decisions of financial statement users
- Pervasive: Effects are not confined to specific elements, accounts, or items; they represent a substantial proportion of the financial statements, or are fundamental to users' understanding
- Sufficient Appropriate Evidence: "Sufficient" relates to quantity; "appropriate" relates to quality (relevance and reliability)
Emphasis-of-Matter vs. Other-Matter Paragraphs
| Paragraph Type | Purpose | Placement | Examples |
|---|
| Emphasis-of-Matter (EOM) | Draw attention to a matter appropriately presented or disclosed in the financial statements | After the opinion paragraph | Going concern; significant related-party transactions; subsequent events; change in accounting principle |
| Other-Matter (OM) | Draw attention to a matter NOT presented or disclosed in the financial statements | After EOM paragraph (if any) or after opinion paragraph | Restriction on distribution; other auditors involved; prior-period statements not audited |
Going Concern: Special Considerations (AU-C 570)
| Scenario | Auditor Action | Opinion Impact |
|---|
| Substantial doubt exists; adequate disclosure provided | Add EOM paragraph referencing the going concern | Unmodified opinion (with EOM) |
| Substantial doubt exists; inadequate disclosure | Qualified or adverse opinion depending on materiality | Modified opinion |
| Management's plans alleviate the doubt | No going concern paragraph needed | Unmodified opinion |
PCAOB vs. AICPA Report Differences
| Feature | AICPA (Nonissuer/Private) | PCAOB (Issuer/Public) |
|---|
| Addressed to | Those charged with governance | Shareholders and board of directors |
| Critical Audit Matters (CAMs) | Not required (Key Audit Matters optional under ISA) | Required for large accelerated filers |
| Internal control opinion | Not required (unless engaged for it) | Integrated audit required (AS 2201) |
| Auditor tenure | Not required | Must disclose number of years as auditor |
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