Forming an Opinion   SEC & PCAOB > PCAOB > Auditing Standard No. 2 > Forming an Opinion and Reporting Auditing Source: PCAOB Release 2004-001 March 9, 2004 Page 22 10. Forming an Opinion and Reporting Auditing Standard No. 2 permits the auditor to express an unqualified opinion if the auditor has identified no material weaknesses in internal control after having performed all of the procedures that the auditor considers necessary in the circumstances. In the event that the auditor cannot perform all of the procedures that the auditor considers necessary in the circumstances, Auditing Standard No. 2 permits the auditor to either qualify or disclaim an opinion. If an overall opinion cannot be expressed, Auditing Standard No. 2 requires the auditor to explain why.4/ 4/ See also SEC Regulation S-X 2-02(f), 17 C.F.R. § 212.2-02(f) ("The attestation report on management's assessment of internal control over financial reporting shall be dated, signed manually, identify the period covered by the report and clearly state the opinion of the accountant as to whether management's assessment of the effectiveness of the registrant's internal control over financial reporting is fairly stated in all material respects, or must include an opinion to the effect that an overall opinion cannot be expressed. If an overall opinion cannot be expressed, explain why."). In addition, the auditor's report is to include two opinions as a result of the audit of internal control over financial reporting: one on management's assessment and one on the effectiveness of internal control over financial reporting. The Board decided that two opinions will most clearly communicate to report readers the nature and results of the work performed and most closely track with the requirements of Sections 404 and 103 of the Act. 11. No Disclosure of Significant Deficiencies The auditor's report must follow the same disclosure model as management's assessment. The SEC's final rules implementing Section 404(a) require management's assessment to disclose only material weaknesses, not significant deficiencies. Therefore, because management's assessment will disclose only material weaknesses, the auditor's report may disclose only material weaknesses. 12. Material Weaknesses Result in Adverse Opinion on Internal Control The previously existing attestation standard provided that when the auditor identified a material weakness in internal control, depending on the significance of the material weakness and its effect on the achievement of the objectives of the control criteria, the auditor might qualify his or her opinion ("except for the effect of the material weakness, internal control was effective") or might express an adverse opinion ("internal control over financial reporting was not effective"). The SEC's final rules implementing Section 404(a) state that "Management is not permitted to conclude that the registrant's internal control over financial reporting is effective if there are one or more material weaknesses in the registrant's internal control over financial reporting." In other words, in such a case, management must conclude that internal control is not effective (i.e., a qualified or "except for" conclusion is not allowed). Similar to the reporting of significant deficiencies, the reporting model for the auditor must follow the required reporting model for management. Therefore, because management is required to express an "adverse" conclusion in the event a material weakness exists, the auditor's opinion on the effectiveness of internal control over financial reporting must also be adverse; Auditing Standard No. 2 does not permit a qualified opinion in the event of a material weakness. However, Auditing Standard No. 2 also requires an opinion on management's assessment in every audit report. In the event of a material weakness, the auditor could express an unqualified opinion on management's assessment, so long as management properly identified the material weakness and concluded in their assessment that internal control was not effective. If the auditor and management disagree about whether a material weakness exists (i.e., the auditor concludes a material weakness exists but management does not and therefore makes the conclusion in its assessment that internal control is effective), then the auditor would render an adverse opinion on management's assessment. The Board chose for the auditor's report to express two opinions in part because it would be more informative when a material weakness exists. 5/ It should be noted, however, that the final rules indicated that an aggregation of significant deficiencies may constitute a material weakness in a company's internal control over financial reporting, in which case disclosure would be required. See Final Rule: Management's Reports in Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, Securities and Exchange Commission Release No. 33-8238, (June 5, 2003) [68 FR 36636].