03. Unmodified (Unqualified) Opinion

Unmodified (Unqualified) Opinion

An unmodified (unqualified) opinion states that the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the entity in conformity with the applicable financial reporting framework.

Unmodified opinion: Term used for nonissuers (private companies).
Unqualified opinion: Term used for issuers (public companies).

Additional Communications Without Modifying the Opinion

In certain circumstances, the auditor may add additional paragraphs to the auditor's report without modifying the auditor's opinion.

Nonissuers use:
- Emphasis-of-Matter paragraph
- Other-Matter paragraph
Issuers use:
- Explanatory paragraph

Emphasis-of-Matter Paragraph (Nonissuers)

An Emphasis-of-Matter paragraph is used to draw users’ attention to a matter appropriately presented or disclosed in the financial statements that is of such importance that it is fundamental to users’ understanding.

✅ Placed immediately after the opinion paragraph.

Required situations:

Going concern uncertainty
Material change in accounting principle (that is justified and appropriately accounted for)
Subsequently discovered facts leading to a change in audit opinion
Financial statements prepared with a special purpose framework

Other-Matter Paragraph (Nonissuers)

An Other-Matter paragraph refers to matters other than those presented or disclosed in the financial statements but that are relevant to users' understanding of the audit, auditor's responsibilities, or auditor’s report.

✅ Placed after the opinion paragraph and any Emphasis-of-Matter paragraphs.

Common examples:

Restricting the use of the auditor’s report
Reporting on supplementary information
Reporting on compliance

Explanatory Paragraph (Issuers)

An Explanatory paragraph is included for issuers (public companies) to describe a matter that requires users’ attention, but does not affect the auditor’s unqualified opinion.

✅ Generally placed after the opinion paragraph.

🔥 Key CPA Exam Points:

Nonissuer ➔ Unmodified opinion + Emphasis-of-Matter/Other-Matter paragraphs
Issuer ➔ Unqualified opinion + Explanatory paragraph
Emphasis-of-Matter ➔ relates to matters already disclosed in the financials.
Other-Matter ➔ relates to matters not disclosed in the financials.
Paragraphs do not modify the opinion.
Placement: After the opinion paragraph.

🔵 CAM vs. KAM

Category	CAM (Critical Audit Matters)	KAM (Key Audit Matters)
Applicable to	Issuers (Public Companies; PCAOB standards)	Nonissuers (Private Entities; AICPA standards)
Required by	PCAOB Auditing Standard (AS 3101)	AICPA (ISA 701)
Definition	Matters communicated (or required to be communicated) to the audit committee, relating to accounts or disclosures that are material and involved especially challenging, subjective, or complex auditor judgment.	Matters that were of most significance in the audit of the financial statements of the current period.
Purpose	To enhance the transparency of the audit for investors and provide insights into especially complex or subjective areas of the audit.	To increase the communicative value of the auditor's report by providing greater transparency about the audit.
Reporting Format	Must be individually identified and described; explain how each CAM was addressed in the audit.	Must be individually described; auditor explains why each KAM was considered key and how it was addressed.
Impact on Audit Opinion	No modification to the opinion itself; CAMs are reported separately in the auditor’s report.	No modification to the opinion; KAMs are included in a separate section in the auditor’s report.
Example Topics	Valuation of goodwill, revenue recognition involving complex estimates, uncertain tax positions.	Similar topics: complex accounting estimates, major transactions, significant events.
If None Exist	No CAMs can occur, but the auditor must explicitly state "No CAMs identified."	KAMs section may be empty if no KAMs, but typically auditors will find at least one.

✨ Key Takeaways

CAM: Only for issuers (public companies), and reporting is mandatory under PCAOB.
KAM: Broader application for nonissuers (private entities) under AICPA standards.
Both do not modify the audit opinion — just add transparency to areas that required significant auditor judgment.
Even if no CAM is found, the auditor must state it explicitly in the report for issuers.

Practice Questions

Question 1

In which of the following situations should an auditor issue an unmodified (unqualified) opinion?

A) The financial statements present fairly, in all material respects, the financial position and results of operations, in conformity with the applicable financial reporting framework.

B) The auditor identifies a material misstatement in the financial statements that remains uncorrected.

C) The auditor is unable to obtain sufficient appropriate audit evidence on a significant account balance.

D) The financial statements are materially misstated due to departure from generally accepted accounting principles (GAAP).

✅ Correct Answer: A)
📚 Explanation:
An unmodified (unqualified) opinion is issued when the auditor concludes that the financial statements are free of material misstatement and are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

(B) A material misstatement would require a qualified or adverse opinion.

(D) A GAAP departure would require a qualified or adverse opinion.

Question 2

Which of the following correctly describes the use of an emphasis-of-matter paragraph in an auditor's report for a nonissuer?

A) It is required when the auditor wants to disclaim an opinion on the financial statements.

B) It is required when the auditor refers to a matter appropriately disclosed in the financial statements that is fundamental to users' understanding.

C) It is included when the financial statements are not prepared in accordance with GAAP.

D) It replaces the standard opinion paragraph in the auditor's report.

✅ Correct Answer: B)
📚 Explanation:
An emphasis-of-matter paragraph is added without modifying the auditor's opinion.

It is used to draw users' attention to a matter that is appropriately presented or disclosed in the financial statements and that is fundamental to understanding them.

(A) Disclaiming an opinion is related to scope limitations or lack of independence, not emphasis-of-matter.

(D) The standard opinion paragraph remains; the emphasis-of-matter paragraph is inserted after the opinion paragraph but does not replace it.