An unmodified opinion provides the highest level of assurance that an audit can provide. Other types of opinions are possible, and there are varying degrees of assurance associated with them. A modified opinion occurs when the audited financial statements contain an issue that the CPA has reservations about, such as a departure from U.S. GAAP, or a limitation on the scope of the audit. An example of a departure from U.S. GAAP is where an organization chooses to not recognize a material amount of certain contributed services. An example of a scope limitation might occur if the external auditor is not able to observe and count year-end inventory because this has already occurred prior to their being engaged for the audit.
An adverse opinion presents a more serious problem. It occurs when financial statements are misleading and management will not correct them. Such financial statements may involve serious departures from U.S. GAAP and cannot be relied on to present fairly the financial position and the results of operations. A disclaimer of opinion occurs when the auditor is unable to form an opinion. A disclaimer must be issued when the auditor lacks independence or is unable to gather enough information to form an opinion (that is, the organization has incomplete records or records that cannot be audited).
These types of audit opinions can be identified by the language in the report that will include a paragraph that indicates the basis for the opinion and includes the applicable name of the report as listed at its top. It should be very clear from the report as to the type of opinion that the auditor issued.