#AskAronson: “Can you explain what a ‘standard audit opinion’ is?”

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AskAronsonThe standard opinion for audits of financial statements conducted in accordance with “auditing standards generally accepted in the United States” (GAAS) explains which financial statements were covered in the audit, the basis of accounting (typically accounting principles generally accepted in the United States of America [GAAP]) applied in preparing the financial statements, management’s responsibility for the statements, the responsibilities of the auditor, and the auditor’s opinion as to whether the financial statements are fairly presented.

What Are the Different Types of Audit Report Modifications?

The three broad types of audit report modifications are: 1) qualified opinions, 2) adverse opinions, and 3) disclaimers of opinion.

Qualified opinions state that except for the effects of the matter(s) to which the qualification relates, the financial statements are fairly presented.  Adverse opinions state that the statements are not fairly presented in accordance with the accounting framework specified.  Disclaimers of opinion disclaim an opinion on the financial statements.

What Could Lead to a Modification of the Standard Audit Opinion?

Significant GAAP departures are cause for either a qualified opinion, or if the departure is material and pervasive, an adverse opinion.  GAAP departures may be in the form of measurement exceptions or disclosure exceptions.  Measurement exceptions arise when GAAP provisions are not properly applied.  Example scenarios include failing to record all lease obligations, failing to properly account for contingent losses related to a lawsuit, or computing depreciation expense in accordance with a methodology other than GAAP.  Disclosure exceptions occur when disclosures or information required by GAAP to be presented are omitted or not presented in accordance with GAAP.  For example, failure to disclose future commitments under long-term leases, present a statement of cash flows, or present comprehensive income and its components is likely to result in a report modification.

Limitations on the auditor’s ability to obtain sufficient appropriate audit evidence can lead to report modifications, or to the auditor withdrawing from the engagement.  Examples of such scope limitations are situations in which the auditor is unable to confirm receivables or observe the physical inventory count.  Scope limitations may be either client or circumstance-imposed; the materiality and source of limitation is evaluated in determining what report is appropriate.

Uncertainties may also trigger audit opinion modifications.  The most typical uncertainty cited in audit opinions is uncertainty as to whether an entity will be able to continue as a going concern.  Such an uncertainty may lead to a disclaimer of opinion.

Given the complexity of GAAP and required disclosures, there are many possible scenarios in which a report modification could be necessary.  If you’d like to find out more about audit opinion modifications relating to your unique circumstances, please contact Aronson Quality Control expert Rachel Plumley at 301.231.6200.

About Aronson LLC

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Aronson LLC has been thinking ahead for its clients for more than 50 years. Aronson’s construction, real estate, government contracting, nonprofit, technology and private industry experts provide innovative audit, tax, and consulting services that help its clients move to the next level. From start-up to exit strategy, Aronson works with companies throughout the entire business lifecycle by proactively identifying opportunities and addressing challenges so that clients are able to focus on their core business. Aronson shows companies how to rethink everything to be more profitable, more competitive and better prepared for the future.

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