SAS Modifications to the Opinion in the Independent Auditor’s Report

SAS Modifications to the Opinion in the Independent Auditor’s Report

(1) Addresses the auditor’s responsibility to issue an appropriate report in circumstances when, in forming an opinion in accordance with proposed SAS Forming an Opinion and Reporting on Financial Statements, the auditor concludes that a modification to the auditor’s opinion on the financial statements is necessary.

(2) The SAS defines a modified report to include a qualified or adverse opinion or a disclaimer of opinion.

(3) Addresses the issuance of a qualified, adverse, or disclaimer of opinion using the auditor’s judgment about the materiality of the matters giving rise to the modification and the pervasiveness of their effects or possible effects on the financial statements.

(4) The ASB believes that the terms material and pervasive, although not explicitly stated in extant AU section 508, are consistent with the concepts embedded in the extant standards and, therefore, will not change, but will, rather, support current practice.

(5) The ASB also believes that the framework, as discussed in the text and in the application material to the proposed SAS, will help auditors better apply the concepts in determining whether a modification to the opinion in the auditor’s report is appropriate.

(6) Consistency of Accounting Principles

(a) Extant standards (AU sec. 508 par. 16–.18 and AU section 420 par. .01–.05) require the auditor to include an explanatory paragraph in the auditor’s report if there has been a change in accounting principles or in the method of their application that has a material effect on the comparability of the company's financial statements. PCAOB Auditing Standard No. 6, Evaluating Consistency of Financial Statements, (AICPA, PCAOB Standards and Related Rules, Rules of the Board, “Standards”), contains the same requirement.

(b) The ISAs do not include a requirement for the auditor to include an emphasis of matter paragraph in the auditor’s report if there has been a change in accounting principles, provided that the nature and magnitude of the change is disclosed in the financial statements under audit.

(c) ISA 705 discusses consistency of application of accounting policies in the context of evaluating whether a material misstatement of the financial statements exists that would give rise to the need for a modified opinion. The proposed SAS Modifications to the Opinion in the Independent Auditor’s Report also contains this requirement.

(d) The ASB has determined that the auditing standards in the United States should retain the extant requirement and include an emphasis of matter paragraph in the auditor’s report if there has been a change in accounting principles or in the method of their application that has a material effect on the comparability of the entity’s financial statements. The redrafted, SAS (AU section 420), Consistency of Application of Generally Accepted Accounting Principles (AICPA, Professional Standards, vol. 1), requires the inclusion of an “emphasis of matter” paragraph in the auditor’s report.