Pete, a CPA, is participating in an audit engagement of ABC Company. He has performed the...

Pete, a CPA, is participating in an audit engagement of ABC Company. He has performed the audit and has determined that an unqualified/unmodified is to be issued but he would like to expand on the rationale for the unqualified/unmodified opinion. What are the situations in which an explanatory paragraph would be necessary in an unqualified/unmodified opinion.

Expert Solution

Situations in which an explanatory paragraph would be necessary in an unqualified / unmodified opinion are as follows -

1. Justified departure from GAAP – The client has to prove to the auditor that unusual circumstances would mislead the stakeholder if they followed GAAP procedures. The auditor needs to decide if the unusual circumstances are a result from “new legislation or an evolution of a new form of business transaction”

2. Inconsistent Application of GAAP – A specific form of change in accounting principle which would mislead the stakeholder, if the stakeholder did not read the auditors additional paragraph and footnote from the financial statements, would justify an unqualified opinion

3. Going Concern – A client that has a possibility of not remaining a going concern, but has footnotes from the management about how they propose to bring their business back to life, would receive an unqualified opinion. The auditor will write an explanatory paragraph that expresses his or her doubt about the going concern of the business in clear and understandable language.

4. Emphasis of a Matter – An auditor must make a judgment decision to determine whether or not to attach a paragraph which explains the matter in the unqualified opinion.

5. Reference to Other Auditors – When the principle auditing firm has a client that is a very large corporation and has many locations, they will sometimes enlist the experience of other auditing firms. When the unqualified audit is complete, the principle auditor will author the shared report. The senior auditor may or may not mention the assisting auditors in the introductory paragraph.

Therefore, in the above given situations an explanatory paragraph would be necessary in an unqualified / unmodified opinion.

ekkarill92 answered 1 year ago

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