Modifications to the Opinion in the Independent Auditor’s ...

1 Modifications to the Opinion in the Independent Auditor s Report1197AU-C Section 705 Modifications to the Opinion in theIndependent Auditor s report (Supersedes SAS No. 122 section 705.)Source: SAS No. 134; SAS No. 137; SAS No. for audits of financial statements for periods ending on orafter December 15, of This section addresses the auditor's responsibility to issue an appro-priate report in circumstances in which, in forming an Opinion in accordancewith section 700,Forming an Opinion and Reporting on Financial Statements,or section 703,Forming an Opinion and Reporting on Financial Statements ofEmployee Benefit Plans Subject to ERISA, the auditor concludes that a modi-fication to the auditor's Opinion on the financial statements is necessary. Thissection also deals with how the form and content of the auditor's report is af-fected when the auditor expresses a modified Opinion .

2 In all cases, the reportingrequirements in section 700 or section 703,Forming an Opinion and Reportingon Financial Statements of Employee Benefit Plans Subject to ERISA, apply;those requirements are not repeated in this section unless they are explicitlyaddressed or amended by the requirements of this of Modified section establishes three types of modified opinions, namely, aqualified Opinion , an adverse Opinion , and a disclaimer of Opinion . The deci-sion regarding which type of modified Opinion is appropriate depends on nature of the matter giving rise to the modification , that is,whether the financial statements are materially misstated or, inthe case of an inability to obtain sufficient appropriate audit evi-dence, may be materially auditor's judgment about the pervasiveness of the effects orpossible effects of the matter on the financial statements (Ref:par.)

3 A1).03 Section 706,Emphasis-of-Matter Paragraphs and Other-Matter Para-graphs in the Independent Auditor's report , and section 701,CommunicatingKey Audit Matters in the Independent Auditor's report , address additional com-munications in the auditor's report that are not modifications to the auditor'sopinion. 2021, AICPAAU-C Conclusions and ReportingEffective section is effective for audits of financial statements for periodsending on or after December 15, 2021. [As amended, effective for audits of fi-nancial statements for periods ending on or after December 15, 2021, by SASNo. 141.] objective of the auditor is to express clearly an appropriately mod-ified Opinion on the financial statements that is necessary in the following cir- auditor concludes, based on the audit evidence obtained, thatthe financial statements as a whole are materially auditor is unable to obtain sufficient appropriate audit ev-idence to conclude that the financial statements as a whole arefree from material purposes of generally accepted auditing standards, the followingterms have the meanings attributed as follows.

4 Modified qualified Opinion , an adverse Opinion , or a dis-claimer of Opinion on the financial term used, in the context of misstatements, to describethe effects on the financial statements of misstatements or thepossible effects on the financial statements of misstatements, ifany, that are undetected due to an inability to obtain sufficient ap-propriate audit evidence. Pervasive effects on the financial state-ments are those that, in the auditor's judgment, are not confined to specific elements, accounts, or items ofthe financial statements; if so confined, represent or could represent a substantialproportion of the financial statements; or regarding disclosures, are fundamental to users' under-standing of the financial in Which a modification to the Auditor s OpinionIs auditor should modify the Opinion in the auditor's report auditor concludes that, based on the audit evidence obtained,the financial statements as a whole are materially misstated or(Ref: par.)

5 A2 .A8) auditor is unable to obtain sufficient appropriate audit evi-dence to conclude that the financial statements as a whole arefree from material misstatement. (Ref: par..A9 .A13)AU-C 2021, AICPAM odifications to the Opinion in the Independent Auditor s Report1199 Determining the Type of modification to the Auditor s OpinionQualified auditor should express a qualified Opinion in the following circum- auditor, having obtained sufficient appropriate audit evi-dence, concludes that misstatements, individually or in the aggre-gate, are material but not pervasive to the financial auditor is unable to obtain sufficient appropriate audit evi-dence on which to base the Opinion , but the auditor concludes thatthe possible effects on the financial statements of undetected mis-statements, if any, could be material but not auditor should express an adverse Opinion when the auditor, hav-ing obtained sufficient appropriate audit evidence, concludes that misstate-ments, individually or in the aggregate.

6 Are both material and pervasive to thefinancial of auditor should disclaim an Opinion when the auditor is unable toobtain sufficient appropriate audit evidence on which to base the Opinion , andthe auditor concludes that the possible effects on the financial statements ofundetected misstatements, if any, could be both material and pervasive. ( .A14 .A15)Consequence of an Inability to Obtain Sufficient Appropriate AuditEvidence Due to a Management-Imposed Limitation After the Auditor HasAccepted the , after accepting the engagement, the auditor becomes aware thatmanagement has imposed a limitation on the scope of the audit that the au-ditor considers likely to result in the need to express a qualified Opinion or todisclaim an Opinion on the financial statements, the auditor should request thatmanagement remove the management refuses to remove the limitation referred to in para-graph.

7 11, the auditor should communicate the matter to those charged withgovernance, unless all of those charged with governance are involved in manag-ing the entity,1and, if appropriate, determine whether it is possible to performalternative procedures to obtain sufficient appropriate audit the auditor is unable to obtain sufficient appropriate audit evidence,the auditor should determine the implications as the auditor concludes that the possible effects on the financialstatements of undetected misstatements, if any, could be materialbut not pervasive, the auditor should qualify the the auditor concludes that the possible effects on the financialstatements of undetected misstatements, if any, could be both ma-terial and pervasive so that a qualification of the Opinion would1 Paragraph .09 of section 260,The Auditor's Communication With Those Charged With Gover-nance. 2021, AICPAAU-C Conclusions and Reportingbe inadequate to communicate the severity of the situation, theauditor shouldi.

8 Disclaim an Opinion on the financial statements orii. withdraw from the audit, when practicable. (Ref: .A17).14If the auditor decides to withdraw from the audit in accordance withparagraph .13bii, before doing so, the auditor should communicate to thosecharged with governance any matters regarding misstatements identified dur-ing the audit that would have given rise to a modification of the Opinion . (Ref:par..A17)Other Considerations Relating to an Adverse Opinion or Disclaimerof the auditor considers it necessary to express an adverse opin-ion or disclaim an Opinion on the financial statements as a whole, the audi-tor's report should not also include an unmodified Opinion with respect to thesame financial reporting framework on a single financial statement or one ormore specific elements, accounts, or items of a financial statement (piecemealopinion). To include such an unmodified Opinion in the same report2in thesecircumstances would contradict the auditor's adverse Opinion or disclaimer ofopinion on the financial statements as a whole.

9 (Ref: par..A18 .A19)Auditor Is Not Independent But Is Required by Law or Regulation to Reporton the Financial the auditor is not Independent but is required by law or reg-ulation to report on the financial statements, the auditor should disclaim anopinion and should specifically state that the auditor is not Independent . Theauditor is neither required to provide, nor precluded from providing, the rea-sons for the lack of independence; however, if the auditor chooses to provide thereasons for the lack of independence, the auditor should include all the reasonstherefor. (Ref: par..A20)Form and Content of the Auditor s report When theOpinion Is ModifiedAuditor s the auditor modifies the audit Opinion , the auditor should usethe heading "Qualified Opinion ," "Adverse Opinion ," or "Disclaimer of Opinion ,"as appropriate, for the " Opinion " section. (Ref: par..A21 .A23)Qualified the auditor expresses a qualified Opinion due to a material mis-statement in the financial statements, the auditor should state that, in the au-ditor's Opinion , except for the effects of the matters described in the "Basis forQualified Opinion " section of the auditor's report , the accompanying financialstatements present fairly, in all material respects, [.]

10 ] in accordance with [theapplicable financial reporting framework]. When the modification arises froman inability to obtain sufficient appropriate audit evidence, the auditor should2 Section 805,Special Considerations Audits of Single Financial Statements and Specific El-ements, Accounts, or Items of a Financial Statement, addresses special considerations relevant to anaudit of a single financial statement or of a specific element, account, or item of a financial 2021, AICPAM odifications to the Opinion in the Independent Auditor s Report1201use the corresponding phrase "except for the possible effects of the "for the modified Opinion . (Ref: par..A24 .A25)Adverse the auditor expresses an adverse Opinion , the auditor shouldstate that, in the auditor's Opinion , because of the significance of the mattersdescribed in the "Basis for Adverse Opinion " section of the auditor's report , theaccompanying financial statements do not present fairly [.