Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

Under what condition should a Basis for Modification paragraph precede the opinion paragraph?

1. When the auditor notes no deficiencies in controls

2. When there is a limitation on the scope of the audit

3. When financial statements are not prepared in accordance with GAAP

4. When the auditor has performed a review instead of an audit

The correct answer is: When there is a limitation on the scope of the audit

A Basis for Modification paragraph should precede the opinion paragraph when there is a limitation on the scope of the audit. This situation arises when the auditor is unable to gather sufficient appropriate audit evidence to form a basis for an opinion on the financial statements. In such cases, the auditor must disclose the limitation and its impact, providing context for the opinion that follows. When scope limitations occur, it’s crucial for the auditor to communicate this in the report to ensure that users of the financial statements understand the reason for any restrictions on the audit findings. This maintains transparency and allows stakeholders to take the limitation into account when reviewing the financial statements. The other scenarios do not warrant a Basis for Modification preceding the opinion. For instance, if financial statements are not prepared in accordance with GAAP, the auditor might express an adverse opinion or a qualified opinion, but this would usually follow the opinion paragraph. In cases where no deficiencies in controls are noted, or a review instead of an audit is performed, the reporting requirements differ and do not specifically involve the need for a Basis for Modification paragraph preceding the opinion paragraph.