The type of opinion is settled by two questions: is there a misstatement? and was I able to obtain sufficient evidence? Then a third question governs the severity: how pervasive is the effect?
1 The components of the report
- Title and addressee: usually the shareholders.
- The opinion paragraph first: the conclusion at the start of the report, not at the end.
- Basis for opinion: that the audit was conducted per the standards and that the auditor is independent.
- Key audit matters where required — the most significant matters in auditing the period.
- Going concern if there is a material uncertainty.
- The responsibilities of management and those charged with governance, and the auditor’s responsibilities.
- Signature, name, professional licence number and date.
2 The four types of opinion
| Opinion | When? | What it means to the reader |
|---|---|---|
| Unmodified (clean) | The statements are fairly presented in all material respects | They can be relied on for a decision |
| Qualified | A material misstatement that is not pervasive, or an inability to obtain evidence over a limited area | Sound except for one specific matter, stated explicitly |
| Adverse | A material and pervasive misstatement in the statements | Not to be relied on; the picture is misleading |
| Disclaimer of opinion | Unable to obtain sufficient evidence, with a material and pervasive effect | No opinion at all; the auditor could not reach a judgement |
The modified opinion matrix: the nature of the matter × how pervasive its effect is
What does “pervasive” mean?
The effect is pervasive if it is not confined to specific elements; or, if it is confined, it represents a substantial proportion of the statements; or the related disclosure is fundamental to understanding them.
3 Paragraphs that do not change the opinion
| Paragraph | Purpose | Example |
|---|---|---|
| Emphasis of matter | Drawing attention to a matter disclosed in the statements and fundamental to understanding them | Major litigation disclosed in the notes |
| Other matter | A matter not disclosed in the statements but relevant to understanding the audit | The prior year was audited by another auditor |
| Key audit matters | The most significant matters in auditing the period | Inventory valuation · revenue recognition · debt provisions |
These paragraphs do not signal a qualification: the opinion remains unmodified, but they steer the reader towards what deserves attention.
Case one: the entity refused to record a material allowance for doubtful debts relating to a single distressed customer. The effect is material but confined to one line item. → Qualified opinion.
Case two: a large subsidiary was not consolidated, contrary to the standard, affecting assets, liabilities, revenue and the result together. → Adverse opinion.
Case three: the auditor was appointed after year end and could not attend the stocktake; inventory makes up most of the assets, and there are no adequate alternative records. → Disclaimer of opinion.
A common misconception
“An emphasis of matter paragraph means the report is not clean.” Not so. The opinion remains unmodified, and the paragraph merely points to information already disclosed in the statements.
Lesson summary
- The opinion appears at the top of the report, driven by whether there is a misstatement or an inability to obtain evidence, and how pervasive the effect is.
- Four types: unmodified, qualified, adverse and disclaimer.
- Qualified for a confined matter, adverse for a pervasive misstatement, disclaimer for an inability to obtain evidence with a pervasive effect.
- Emphasis of matter, other matter and key audit matters do not modify the opinion.
- Read the report starting from the type of opinion, then its basis, then the key audit matters.
4 Test your understanding
Three quick questions
Pick the answer you believe is correct and you will see the result immediately.
1. A material misstatement whose effect is pervasive across the statements. What opinion?
Pervasiveness escalates a qualification into an adverse opinion; a disclaimer is for an inability to obtain evidence, not for a known misstatement.
2. The report contains an “emphasis of matter” paragraph. What does that mean?
The paragraph does not change the opinion; it highlights an important matter already in the notes.
3. The auditor could not attend a stocktake of inventory that makes up most of the assets, with no adequate alternative. What opinion?
An inability to obtain evidence with a material and pervasive effect prevents forming an opinion at all, so a disclaimer follows.