@Dr Cash A Milli –
That's a “rule” – but I can't memorize everything in that book, I need the reasons/logic behind it. In thinking about the statements and the impact of that uncertainty on the beginning balance, does this make sense for why the split opinions are as prescribed in AU-C 510.A17? (I'm assuming a retail operation here, it's simpler to “walk through” than manufacturing – but the same basic logic should apply, I think.)
The ending balances are known and we have as much confidence as is possible, having observed inventories and collected evidence sufficient to support them – That would support the unmodified opinion on the balance sheet/statement of financial position.
The operations and cash flows, however, depend on knowing where the assets/inventory started AND where it ended, as the revenues and costs stem from Beginning balance + Additions (purchases) less Subtractions (sales) equals Ending balance. Even if you are certain of the Additions and Subtractions from source documents, you aren't fully confident in sales because you don't really know how much was sold from that uncertain beginning balance. Therefore your sales/revenue and cost of goods sold are uncertain. If the probable amount is material (as would be the case for a retailer since inventory/sales revenue is the principal source of income) the opinion on Income Statement and Statement of Cash Flows must be modified.
As for choosing the type of modified opinion: the inability to ascertain beginning balances is a scope limitation (another place I struggle) because the auditor was for some reason not able to observe inventory counts or review sufficient documentation from a predecessor to be confident in that balance – GAAS issue not GAAP, so Adverse is “off the table”. Opinion will be Qualified if the amount is material but not pervasive, and Disclaimer if the amount is “very material” or pervasive.
Does that cover everything?
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