Under ISA 700 and ISA 705, the auditor expresses an "unmodified" opinion when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. Where a modification is required, the standards establish only three types of modified opinion: a qualified opinion, an adverse opinion, and a disclaimer of opinion.
How Does the Auditor Form an Unmodified Opinion?
ISA 700 requires the auditor to form an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework, and this evaluation shall include consideration of the qualitative aspects of the entity's accounting practices, including indicators of possible bias in management's judgments.
What Determines the Type of Modified Opinion?
The decision on which type of modified opinion is appropriate depends on two things: the nature of the matter giving rise to the modification, that is, whether the financial statements are materially misstated or, in the case of an inability to obtain sufficient appropriate audit evidence, may be materially misstated; and the auditor's judgment about the pervasiveness of the effects or possible effects of the matter on the financial statements. Pervasive describes effects on the financial statements that are not confined to specific elements, accounts or items, or that represent a substantial proportion of the statements, or that, in relation to disclosures, are fundamental to users' understanding.
When Does the Auditor Express a Qualified Opinion?
The auditor shall express a qualified opinion when, having obtained sufficient appropriate audit evidence, the auditor concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements.
When Is an Adverse Opinion or a Disclaimer of Opinion Expressed?
The auditor shall express an adverse opinion when, having obtained sufficient appropriate audit evidence, the auditor concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements. The auditor shall disclaim an opinion when unable to obtain sufficient appropriate audit evidence on which to base the opinion, and concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.
Can an Adverse Opinion or Disclaimer Be Combined With an Unmodified Opinion in the Same Report?
No. When the auditor considers it necessary to express an adverse opinion or disclaim an opinion on the financial statements as a whole, the standard requires that the auditor's report shall not also include an unmodified opinion with respect to the same financial reporting framework on a single financial statement or one or more specific elements, accounts or items of a financial statement.
Legal References
- ISA 700 (Revised) — Forming an Opinion and Reporting on Financial Statements, Paragraphs 7(c), 10 and 12.
- ISA 705 (Revised) — Modifications to the Opinion in the Independent Auditor's Report, Paragraphs 2, 5(a), 7, 8, 9 and 15.
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