The decision grid
Two questions decide the opinion: What is the problem? (a misstatement, or an inability to obtain evidence) and How bad is it? (material, or material and pervasive).
| Nature of the issue | Material but NOT pervasive | Material AND pervasive |
|---|---|---|
| Financial statements are misstated (GAAP departure) | Qualified | Adverse |
| Unable to obtain sufficient appropriate evidence (scope limitation) | Qualified | Disclaimer |
IMPORTANT: "Pervasive" is the hinge word. It means the effects are not confined to specific elements, or if confined, represent a substantial proportion of the statements, or relate to disclosures fundamental to users' understanding.
Structure of the nonissuer report
Opinion section first, then Basis for Opinion, then (if applicable) Going Concern and Key Audit Matters, then Responsibilities of Management, then Auditor's Responsibilities, then signature, city/state, and date.
Emphasis-of-matter vs. other-matter
| Paragraph | Refers to… | Examples |
|---|---|---|
| Emphasis-of-matter | Something presented or disclosed in the financial statements | Justified change in accounting principle, significant related-party transaction, major catastrophe, going concern doubt |
| Other-matter | Something not in the financial statements | Prior period audited by a predecessor, restricting use of the report, other reporting responsibilities |
Neither paragraph modifies the opinion. Both are placed after the Basis for Opinion section, with an appropriate heading.
EXAMPLE: A client refuses to consolidate a material subsidiary that GAAP requires be consolidated, and the subsidiary represents most of the group's assets and revenue. This is a GAAP departure that is both material and pervasive → adverse opinion.
EXAM TIP: Issuer (PCAOB) reports differ: they include Critical Audit Matters (CAMs), state the auditor's tenure ("We have served as the Company's auditor since…"), and use different section headings. Nonissuer reports may include Key Audit Matters only when engaged to do so.