How an Audit Works, Part 4: Opinions, Going Concern and the Report
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Everything in the first three parts existed to produce one paragraph. This is that paragraph.
The wrap-up phase covers subsequent events, going concern, the management representation letter and then the opinion itself. The opinion is the highest-yield topic in AUD, and it is also one of the most learnable, because the entire decision reduces to two questions asked in a fixed order.
AUD 101: the complete audit process
- Client acceptance, engagement letter, documentation and planning
- Audit risk, materiality, assertions and types of procedures
- Substantive testing, sampling and the legal inquiry letter
- Subsequent events, going concern, representations and the opinion (you are here)
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In this article
How do auditors handle subsequent events?
Subsequent events happen between the balance sheet date and the date of the auditor's report. If the year end is December 31 and the report is dated March 15, everything in that window has to be evaluated.
One question decides the treatment: did the condition causing the event already exist at the balance sheet date? Not when the event happened. When the underlying condition arose.
| Recognized (Type 1) | Nonrecognized (Type 2) | |
|---|---|---|
| Condition at year end | Already existed | Arose afterwards |
| Treatment | Adjust the financial statements | Do not adjust. Disclose if the statements would otherwise be misleading. |
| Example | A customer files for bankruptcy in February over a receivable outstanding at December 31. The inability to pay existed at year end, so the allowance is adjusted. | A fire destroys the warehouse in February. No condition existed at December 31, so the statements stand and a footnote explains. |
The date of the event is a distractor. Both examples happen in February. What separates them is whether the cause was already present on December 31. A question that emphasizes when something occurred, rather than when the condition arose, is testing exactly this.
After the report is issued
Once the report is out, the auditor has no obligation to keep looking. But if a fact comes to light that existed at the report date and would have changed the report, that is a subsequently discovered fact, and the auditor has to act: discuss it with management, determine whether the statements need revision, and if they do, whether anyone is still relying on the report.
Where revised statements are issued, the auditor either dates the new report as of a later date or uses dual dating, carrying the original date for the audit as a whole and a later date for the specific revised item. Dual dating limits the auditor's responsibility for other events to the original date, which is why it exists.
What happens when there is doubt about going concern?
Financial statements are prepared on the assumption that the entity will keep operating for a reasonable period. When conditions suggest otherwise, recurring losses, negative cash flows, defaults, loss of a principal customer, the auditor must evaluate whether there is substantial doubt.
The evaluation runs in two steps. First, do conditions or events raise substantial doubt? If they do, second, do management's plans alleviate it?
| Situation | Disclosure | Effect on the opinion |
|---|---|---|
| No substantial doubt | None required | None |
| Substantial doubt raised, alleviated by management's plans | Disclosure of the conditions and the plans | Unmodified, with no separate going concern section required |
| Substantial doubt raised, not alleviated | Disclosure required | Unmodified, plus a separate section headed "Substantial Doubt About the Entity's Ability to Continue as a Going Concern" |
| Substantial doubt not alleviated and disclosure inadequate | Missing or insufficient | Qualified or adverse, because this is now a GAAP departure |
Going concern doubt does not by itself modify the opinion. Read the third row again. The entity may be in serious trouble and the opinion is still unmodified, because the auditor's question is whether the statements are fairly presented, not whether the business is healthy. The opinion only moves if the disclosure is inadequate. This trips up more candidates than any other reporting topic.
What is the management representation letter?
The engagement letter opened the audit. This one closes it. Throughout the engagement management makes verbal assertions, and the representation letter puts them in writing on company letterhead, addressed to the auditor.
Two mechanical points the exam likes. It is signed by those with overall responsibility for financial and operating matters, typically the chief executive and chief financial officer. And it is dated as of the date of the auditor's report, not the balance sheet date and not the day fieldwork finished, because the representations have to cover everything up to the moment the opinion is given.
| Fair presentation | Management is responsible for preparing and fairly presenting the statements |
|---|---|
| Internal control | Management is responsible for the design, implementation and maintenance of controls |
| Completeness of information | All records, documentation and access have been provided |
| Fraud | Management has disclosed its assessment of fraud risk and any known or suspected fraud |
| Laws and regulations | All known instances of noncompliance have been disclosed |
| Subsequent events | All events requiring adjustment or disclosure have been disclosed |
| Litigation | All known actual or possible claims have been disclosed |
| Uncorrected misstatements | Management believes the effect of uncorrected misstatements is immaterial, individually and in aggregate |
Notice that the first three mirror the responsibilities management accepted in the engagement letter back in part one. That is deliberate. The engagement letter takes the undertaking; the representation letter confirms it was met.
If management refuses to sign, the result is a disclaimer, not a qualified opinion. This is the exception to the usual "how pervasive is it" analysis. The written representations are a required element of evidence, so a refusal means the auditor should disclaim an opinion or withdraw from the engagement. A refusal also says something about management's integrity, which puts every other representation obtained during the audit into question.
What are the four audit opinions?
| Opinion | Cause | The key phrase |
|---|---|---|
| Unmodified | No material issues | Present fairly, in all material respects |
| Qualified | GAAP departure or scope limitation, material but not pervasive | Except for |
| Adverse | GAAP departure, material and pervasive | Do not present fairly |
| Disclaimer | Scope limitation, material and pervasive | We do not express an opinion |
A report is issued in all four cases. A disclaimer is not silence. The auditor produces a report which states that no opinion is being expressed and explains why. Candidates who read "disclaimer" as "walked away" lose the question.
Terminology, since both appear on the exam: unmodified is the AICPA term used for nonissuers, and unqualified is the PCAOB term used for issuers. Same meaning.
The two-question framework
Every opinion question resolves through two questions in this order.
First, what kind of problem is it?
| GAAP departure | Scope limitation |
|---|---|
| The auditor knows the statements are materially misstated. Evidence was obtained, and it shows a problem. | The auditor does not know. Sufficient appropriate evidence could not be obtained, so no conclusion is possible for that area. |
Second, how bad is it?
Non-pervasive means confined to a specific area. Pervasive means it affects the statements broadly, or relates to items representing a substantial proportion of them, or concerns disclosures fundamental to a user's understanding.
| Material, not pervasive | Material and pervasive | |
|---|---|---|
| Cannot obtain evidence | Qualified | Disclaimer |
| Statements are misstated | Qualified | Adverse |
Read the shape of that grid. Qualified fills the whole left column, so it can arise from either cause. Adverse and disclaimer each occupy a single cell, so each has exactly one cause. Adverse only ever follows a pervasive misstatement, and a disclaimer only ever follows a pervasive inability to obtain evidence.
| Opinion | A typical trigger |
|---|---|
| Qualified, GAAP departure | One misstated balance, or an omitted disclosure with limited effect |
| Qualified, scope limitation | Unable to obtain evidence over one account of limited significance |
| Adverse | The entity uses a basis of accounting so far from the framework that "except for" would understate the problem |
| Disclaimer | Records for a substantial portion of transactions are inadequate, or management will not provide written representations |
Emphasis-of-matter and other-matter paragraphs
Neither of these modifies the opinion. Both add a separate section to an otherwise unchanged report, and the difference between them is where the matter lives.
| Emphasis-of-matter | Other-matter | |
|---|---|---|
| Refers to something | Presented or disclosed in the financial statements | Not presented or disclosed in the financial statements |
| Typical use | A significant subsequent event, a major catastrophe, a change in accounting principle, substantial uncertainty from unusual litigation | Prior period statements audited by a predecessor, restricting use of the report, reporting on supplementary information |
| Opinion affected | No | No |
The test is a single question: is the thing you want to highlight already inside the statements? If yes it is emphasis-of-matter. If it concerns the audit or the report rather than the statements, it is other-matter.
What is in the audit report?
For a nonissuer, in this order:
| Title | Includes the word "Independent" |
|---|---|
| Addressee | Usually those charged with governance or the shareholders |
| Opinion | The opinion itself, stated first. Identifies the entity, the statements audited and the periods covered. |
| Basis for Opinion | States the audit followed generally accepted auditing standards, that the auditor is required to be independent and has met its ethical responsibilities, and that sufficient appropriate evidence was obtained. For a modified opinion, this section explains the reason. |
| Going concern section | Only when substantial doubt exists and is not alleviated |
| Key audit matters | Only when the auditor is engaged to report them |
| Responsibilities of Management | Preparation and fair presentation, internal control, and evaluating the ability to continue as a going concern |
| Auditor's Responsibilities | Obtaining reasonable assurance, exercising professional judgment and skepticism, and communicating with those charged with governance |
| Signature, city and state, date | The date is the date sufficient appropriate evidence was obtained |
The opinion comes first. Older report formats buried it at the end, and older study materials still show that layout. Current standards put it at the top because it is what users actually need. The reordering also explains why the responsibilities sections moved to the back.
The whole audit, in one table
| Phase | Covered in | Topics |
|---|---|---|
| Before the audit | Part 1 | Client acceptance and integrity, preconditions and management's responsibilities, the engagement letter, documentation and retention, sufficient and appropriate evidence, nature timing and extent, strategy and plan, planning analytics, understanding controls, the predecessor auditor, relying on internal auditors, specialists and component auditors |
| Assessing risk | Part 2 | The audit risk model, risk of material misstatement against detection risk, financial statement and assertion levels, tests of controls against substantive procedures, the two assertion categories, materiality and performance materiality |
| Fieldwork | Part 3 | Directional risk, cash including lapping kiting and the cutoff statement, receivables and confirmation types, inventory attendance and test counts, investments, fixed assets, payables and the search for unrecorded liabilities, debt, equity, sampling and sampling risk, the legal inquiry letter |
| Wrapping up | Part 4 | Subsequent events and dual dating, going concern, the representation letter, the four opinions, emphasis-of-matter and other-matter paragraphs, the report |
Read that table top to bottom and you have the argument of the whole section. Each phase exists because of a question the previous one raised, which is why AUD rewards understanding the sequence far more than memorizing any individual rule inside it.
Where does Maxwell CPA Review fit?
Concessions first. If you want the largest question bank available, that goes to Gleim or UWorld. If your firm sponsors a course, it is usually Becker, and there is no reason to decline something already paid for. If you want adaptive software that scores your readiness, Surgent does that better than I do.
What Maxwell CPA Review does is different, and this four-part series is a sample of it. Every other option in this category answers a shortage: more questions, longer explanations, more visuals. Maxwell answers a surplus. AUD is not short of material. It is short of sequence, and four articles of sequence will do more for you than four hundred disconnected rules.
Here is what is in the AUD section:
| Video lessons | 6 hours |
|---|---|
| Practice MCQs | 750 |
| Task-based simulations | 32 |
| Textbook | 190 pages |
| Study outlines | 60 pages |
| Also included | Final review and a full simulated exam |
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Frequently asked questions
What are the four types of audit opinion?
Unmodified when no material issues exist, qualified for a material but not pervasive GAAP departure or scope limitation, adverse for a material and pervasive GAAP departure, and disclaimer for a material and pervasive scope limitation. A report is issued in all four cases.
What is the difference between a GAAP departure and a scope limitation?
A GAAP departure means the auditor knows the statements are materially misstated, having obtained the evidence. A scope limitation means the auditor could not obtain sufficient appropriate evidence and therefore does not know. Known problem against unknown problem.
Does going concern doubt change the audit opinion?
Not by itself. Where substantial doubt exists and is not alleviated, the opinion remains unmodified and the report adds a separate section headed "Substantial Doubt About the Entity's Ability to Continue as a Going Concern." The opinion only changes if the required disclosure is inadequate, which makes it a GAAP departure leading to a qualified or adverse opinion.
What are the two types of subsequent event?
Recognized events arise from conditions that already existed at the balance sheet date and require the statements to be adjusted. Nonrecognized events arise from conditions that came about afterwards and require disclosure only. The date of the event is irrelevant; only the date of the underlying condition matters.
What happens if management refuses to sign the representation letter?
The auditor should disclaim an opinion or withdraw from the engagement. Written representations are a required element of audit evidence, so this is not resolved through the usual pervasiveness analysis, and a refusal also calls into question every other representation obtained during the audit.
When is the management representation letter dated?
As of the date of the auditor's report, not the balance sheet date and not the completion of fieldwork, because the representations must cover the entire period up to the point the opinion is expressed.
What is the difference between emphasis-of-matter and other-matter paragraphs?
An emphasis-of-matter paragraph refers to something already presented or disclosed in the financial statements. An other-matter paragraph refers to something not in the statements, such as prior periods audited by a predecessor or a restriction on the report's use. Neither modifies the opinion.
What is the order of sections in a nonissuer audit report?
Title, addressee, Opinion, Basis for Opinion, any going concern or key audit matters sections, Responsibilities of Management, Auditor's Responsibilities, then signature, city and state and the date. The opinion comes first under current standards.
That is the whole audit
From client acceptance to the opinion, in four parts. Start with the 2026 AICPA released questions and the free study outline, and see whether the approach fits how you learn.
Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 90 on AUD and a 95 on FAR. He is the founder and sole instructor of Maxwell CPA Review, where he creates every lecture, textbook and study outline himself.
Reach him at MaxwellCPAreview@gmail.com.
Explore the Complete AUD 101 Series
The foundation of the audit, from engagement letters to initial strategy.
Master the audit risk formula, materiality, and the framework that drives procedures.
A complete walkthrough of the balance sheet, sampling, and the legal letter.
Concluding the audit, handling subsequent events, and issuing the final report.