Auditors may express one of four types of opinions on financial statements –
Unmodified – the opinion that is expressed when the auditor concludes that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. For the purposes of local auditee audit reports that are submitted to the Louisiana Legislative Auditor (LLA), generally accepted accounting principles is the financial reporting framework.
Qualified – the opinion that is expressed when the auditor either (a) having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material but not pervasive to the financial statements; or (b) is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.
Adverse – the opinion that is expressed when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.
Disclaimer – the opinion that is expressed when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.
Most audit reports receive unmodified opinions, the type of opinion that all local auditees should strive to achieve.
The three types of opinions (qualified, adverse, and disclaimer) that are not unmodified opinions are referred to as modified opinions. LLA’s response when it receives a report with a modified opinion is based on the reason for the modification.
When a report with a qualified opinion is received, LLA determines the reason that the qualification of opinion was given. It may be that the local auditee has included most, but not all, of the elements required by generally accepted accounting principles in its financial statements. Or, the auditor may believe there is a material error in the financial statements that the local auditee will not correct. If the reason for the qualified opinion is within the local auditee’s ability to correct, and LLA believes it should be corrected, LLA will generally require that a finding be included in the report describing the condition that caused the qualified opinion, with management’s plan of corrective action to resolve the condition. The finding may be waived if LLA believes that the condition is beyond the control of the local auditee, or if LLA believes that the local auditee’s decision not to correct the condition is reasonable.
LLA receives many reports with adverse opinions. Typically these are local auditees, such as parish governing authorities or municipalities that have one or more component units, but choose to include only the financial activity of the main or primary government in their audit report. When LLA receives an audit report with an adverse opinion because of omitted component units, the only action LLA usually takes is to ensure that all omitted component units are submitting a separate annual financial report to LLA. The auditor’s opinion should include the effect of the omitted component units on the financial statements; or a statement that the effect is not known or is indeterminable. LLA treats a report with an adverse opinion for any reason other than omitted component units in much the same way it treats a report with a qualified opinion.
LLA considers a local auditee that provides for an audit report with a disclaimer of opinion to be in noncompliance with the local auditee’s reporting requirement to LLA under the audit law (Louisiana Revised Statute 24:513). LLA expects the CPA to include a finding in this type of report with a full explanation for the reason for the disclaimer of opinion.
After evaluation of the reason for the disclaimer of opinion, LLA may place the local auditee on the noncompliance list pending receipt of the following:
- The local auditee’s written plan to correct the condition that caused the disclaimer of opinion (corrective action plan)
- The name of the governing board member (if applicable) who has been named to monitor the local auditee’s implementation of the corrective action plan
- The name of the certified public accountant who has been hired to assist the local auditee in implementing the corrective action plan
Based on the content of the corrective action plan, LLA may require nothing further of the local auditee; or it may require additional information, or actions to be taken. LLA may remove the local auditee’s name from the noncompliance list, or may leave them on the noncompliance list until the local auditee can provide for a report with an unmodified opinion.
- Why does LLA generally require a finding in a local auditee report in which the auditor expresses a modified opinion for a reason other than omitted component units?
- I am a CPA working on an audit. I believe that we will be rendering a disclaimer of opinion. Do I need to notify LLA before the report is submitted?
- Should the auditor’s opinion be modified if management of the local government chooses not to present a management’s discussion and analysis (MD&A) statement with the financial statements?
- My CPA firm was engaged to perform an audit. After the field work was substantially complete, we determined that we were no longer independent regarding the agency we are auditing. May we issue a disclaimer of opinion?