A qualified opinion is the auditor’s opinion that the financial statements are presented fairly, in all material respects, except for the effects, or the possible effects, of a matter that the auditor’s report describes and the opinion paragraph refers to. That carve-out changes what a reader should conclude about part of the statements without withdrawing the opinion on them as a whole. The four-outcome grid it sits in, the definition of pervasive that separates it from an adverse opinion and a disclaimer of opinion, and the naming split behind unqualified and unmodified are set out in audited report.
The Two Routes In, and the Word That Changes
Two different failures produce a qualified opinion, and the report does not word them the same way.
On the first, the auditor has obtained sufficient appropriate audit evidence and concludes that misstatements are material but not pervasive. On the second, the auditor could not obtain that evidence and concludes that the possible effects of undetected misstatements could be material but not pervasive (AICPA, AU-C section 705, paragraph .08).
The wording then follows the route. A misstatement gets except for the effects of the matters described in the Basis for Qualified Opinion section, while missing evidence gets except for the possible effects of the matters (AICPA, AU-C section 705, paragraph .18). One word, possible, separates a problem the auditor measured from one the auditor could not reach.
Give either route a pervasive effect and the outcome changes instead, to an adverse opinion where the auditor has the evidence and a disclaimer of opinion where the auditor does not (AICPA, AU-C section 705, paragraphs .09 and .10).
Whether something is a misstatement at all is treated in misstatements, and whether one is material in materiality and materiality in auditing.
Issuer audits reach both routes without pervasive as a defined dividing line, framing them as a lack of sufficient appropriate evidential matter or a scope restriction where the auditor concluded not to disclaim, and a material departure from generally accepted accounting principles where the auditor concluded not to express an adverse opinion (PCAOB, AS 3105, paragraph .02).
Pervasiveness survives there only as one of the factors bearing on materiality when the auditor decides between a qualified and an adverse opinion on such a departure (PCAOB, AS 3105, paragraph .19).
That standard also polices the phrasing. The opinion should carry the word except or exception, phrases such as subject to and with the foregoing explanation are not clear or forceful enough to use, and on a scope limitation the qualification has to pertain to the possible effects on the financial statements rather than to the limitation itself (PCAOB, AS 3105, paragraphs .04 and .09).
What the Report Has to Show
A qualified opinion moves two headings and adds content underneath them.
The Opinion section is retitled Qualified Opinion, and the Basis for Opinion heading that sits directly following it becomes Basis for Qualified Opinion and describes the matter giving rise to the modification (AICPA, AU-C section 705, paragraphs .17 and .21; AICPA, AU-C section 700, paragraph .28).
Where the misstatement relates to specific amounts, the section quantifies the financial effects unless doing so is impracticable, and says so when it is; where the cause was missing evidence, it gives the reasons (AICPA, AU-C section 705, paragraphs .22 and .25).
Issuer reports place that explanation in one or more separate paragraphs immediately following the opinion paragraph, and the opinion paragraph carries the qualifying language and a reference to those paragraphs (PCAOB, AS 3105, paragraph .04). Where the cause is a scope limitation or an insufficiency of evidential matter, that description is referred to in both the Basis for Opinion section and the opinion paragraph rather than carried inside the Basis for Opinion section (PCAOB, AS 3105, paragraph .08).
Where the qualification is a departure from generally accepted accounting principles, those paragraphs also disclose the principal effects of the subject matter of the qualification on financial position, results of operations, and cash flows if practicable, and the report says so where the effects are not reasonably determinable (PCAOB, AS 3105, paragraph .21).
Substantial Doubt About Going Concern Is a Separate Outcome
Substantial doubt about an entity’s ability to continue as a going concern does not by itself qualify the opinion. Where the doubt remains and the financial statements disclose it adequately, the report carries a separate section headed Substantial Doubt About the Entity’s Ability to Continue as a Going Concern, which draws attention to that note and states that the auditor’s opinion is not modified with respect to the matter (AICPA, AU-C section 570, paragraph .24).
The qualification comes from the disclosure failing, not from the doubt. Where adequate disclosure about going concern is not made, the auditor expresses a qualified or adverse opinion and states in the Basis for Qualified (Adverse) Opinion section that the statements do not adequately disclose the matter (AICPA, AU-C section 570, paragraph .26). The doubt itself is treated in going concern.
What Follows a Qualified Opinion
The consequences start before the report is issued and outlast the year it covers.
When the auditor expects to modify the opinion, the circumstances leading to it and the wording of the modification are communicated to those charged with governance, so the wording is known to them before the report is signed (AICPA, AU-C section 705, paragraph .31).
A qualified opinion is a modified opinion by definition (AICPA, AU-C section 705, paragraph .06), so a covenant or grant condition written against an unmodified or unqualified opinion is not satisfied.
Federal grant work makes that concrete. An auditee qualifies as a low-risk auditee only if, for each of the preceding two audit periods, the opinion on the financial statements and the in-relation-to opinion on the schedule of expenditures of federal awards were unmodified (2 CFR 200.520).
Losing that status raises the percentage of coverage rule from at least 20 percent of total federal awards expended to at least 40 percent (2 CFR 200.518), so one qualification can double the coverage floor for each of the next two single audits.
Common Questions
An unqualified opinion carves nothing out. A qualified opinion carves one thing out, either the effects of a misstatement the auditor measured or the possible effects of evidence the auditor could not obtain, and, in an audit of a non-issuer, names that matter in the Basis for Qualified Opinion section (AICPA, AU-C section 705, paragraphs .08 and .18).
Qualified here means limited by an exception rather than well credentialed, and the standard requires the qualified opinion to carry the word except or exception (PCAOB, AS 3105, paragraph .04). The unqualified one is the report with no such exception in it.
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