Modified Audit Opinion

An unmodified opinion says the statements are fairly presented in all material respects. Three kinds of modification exist. A qualified opinion says the statements are fair except for a specific matter that is material but not pervasive. An adverse opinion says the misstatement is both material and pervasive, so the statements do not present fairly overall. A disclaimer means the auditor could not get enough evidence, and the possible effects are material and pervasive, so no opinion is given. A section titled basis for the opinion explains the reason. Common triggers are a disagreement over an accounting treatment or a limit on the audit’s scope, such as stock that could not be counted. Lenders, exchanges and regulators watch for modified opinions, and covenants or listing rules may be affected. Loan agreements sometimes treat a modified opinion as a default event.

A trading company refuses to write down receivables from a customer in liquidation, a 6% overstatement of total assets. The auditor decides the effect is material but limited to one area and issues a qualified opinion, fair “except for” that balance. If management had also refused to let the auditor see the books of a major subsidiary, the auditor would have had to consider a disclaimer.