 Oh, and welcome to this session. This is Professor Farhad. In this session, we will discuss when unmodified opinion is not justified. And specifically, we're gonna be looking at gas issues, not gap issue. In the prior session, we looked at gap issue. Now we would look at gas. This topic is typically covered in the auditing and attestation course, the CPA exam, the auditing section. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,600 plus accounting, auditing, finance and tax lectures. This is a list of all the courses that I covered, including a lot of CPA questions. If you like my lectures, please like them. Click on the like button. It doesn't cost you anything. Share them, subscribe. If they benefit you, it means they might benefit other people. And especially these days, the coronaviruses out there, students are going online, so they might benefit other people. And please connect with me on Instagram. If you are looking for supplemental material for your education, especially for your CPA exam, please check out my website, farhatlectures.com. So we're gonna look first at condition for unmodified opinion or unqualified clean opinion. And we talked about those opinion in the prior session, but it's good to remember what we did. We include all the financial statements. We obtain sufficient appropriate evidence. The financial statements are presented fairly with gap and no circumstances requiring the addition of an emphasis of a matter or modification. So under those circumstances, we give an unmodified or unqualified or clean opinion, whatever you want to call it, which is everything is good. Also, if we needed explanatory paragraph, we would still report an unqualified or clean opinion. Now we're gonna look at circumstances where unmodified is not justified. Simply put, we cannot give a clean opinion. And in the prior session, I told you, we could have two issues, two main issues. One could be a gap and one could be a gas issue. Gap, it means the financial statements are not prepared in accordance with gap and the auditor disagree. We already covered this issue in the prior topic. We looked at detailed example about when we are not in compliance with gap. Now we're gonna look at gas. So we have a scope limitation. The scope of the audit has been restricted, which is called the scope limitation, or the auditor is not independent. So now we need to talk about gas. Remember under gap, kind of it's good to review what we do if there is any issue, we could give a qualified depending on the materiality and the severity of the problem, or we can give adverse. So those were the two opinion we would give if we don't give an unmodified opinion in the issue as gap. Now for gas, I'm gonna tell you right now, we might give a qualified, I'm gonna tell you right now, or we might give a disclaimer. It's good to see them side by side. So qualified, we could have a gas or a gap issue. However, gap, we use the term adverse for a bad opinion. For gas, we use the term disclaimer and we're gonna see the details of it. So gas, it's either qualified or disclaimer. So when do we give a qualify? When do we give the disclaimer? Well, simply put, the issue is deals with evidence. If we are unable to obtain appropriate evidence, but the auditor conclude that the possible effect of the material misstatement is material, but not severe or pervasive. So we could not collect enough evidence that's material, but it's not severe and pervasive. So material, but not severe and pervasive. We still had a scope limitation, but if it's not severe and pervasive, we could give a qualified opinion. So what could be some examples of scope limitation? Just kind of, so what are we talking about here? We're talking about time constraint, okay? For example, we did not have enough time to finish the audit. Well, that's a problem. That's a problem, that's an issue. But how severe is it? Is it severe or not severe? It's an important, it's material, but depending on the severity of it. We were not able to obtain inventory. Well, that's material, but is that severe? Is inventory a large amount? Were we able to observe some of the inventory and not others, so on and so forth? We are unable to confirm a count receivable. That's the material, but is it severe? We were unable to obtain an attorney letter. Those are examples of it. Maybe the accounting record is not adequate, but how bad is it? How bad is it? Is it everywhere or to a specific division, specific account? What are we talking about here? What's the severity of it? So if it's material, all of these are material. And what are these? These are auditing procedures. And they are all material, but the question is, are they severe or not severe? So simply put, we are confined or restricted somehow. The restriction could be done by circumstances. We are constrained by circumstances. For example, when they counted the inventory, we were not there at the beginning of the year. So we just had to accept the beginning inventory or we could be restricted by management. And this is a problem. If management is restricted than us, basically management is saying, you can do it. Then the auditor just don't sit around and accept. They're gonna have to ask somebody higher than management, usually the board of directors or more specific, the audit committee to comply, the ask management to comply. And usually they would comply if they don't want a disclaimer because disclaimer is bad. Now let's switch gears. If these examples that we just discussed, the scope limitations are severe and pervasive. They are material, but they are also severe and pervasive. Now we give a disclaimer. Disclaimer is not good. We don't give an adverse. Remember, adverse is gap issue. We're not dealing with gap. Here we are dealing with gas. So remember, this is a gap issue. So basically what does it mean? It means we cannot collect enough evidence and we cannot make a decision as a result of wheel. We cannot collect enough evidence and we don't have alternative method. We're not comfortable with making a decision. We just disclaim. We don't say it's adverse. We just say we could not collect enough evidence. Remember, disclaimer is for gas, adverse is for gap and they're both no good. But you need to know which is which because on the exam, on the CPA exam, they will always try to trick you in telling you it's a gas issue and do you do an adverse? No, a gas issue is a disclaimer. For gap issue, you'll give an adverse. They're both no good. Now let's look at an example with a disclaimer. Remember, disclaimer is not good like the equivalent of, not the equivalent. Yeah, basically the equivalent of an adverse for gap. And basically what we said is we do not express an opinion on the financial statements of this company because the significance of the matter described in the basis for the disclaimer of the opinion section of our report. We have not been able to obtain sufficient appropriate evidence to provide the basis. Now, if we go back here, if we kind of think about the sufficient appropriate evidence, remember the four conditions for the clean opinion. Let's look at the four conditions. One of them is sufficient appropriate evidence. So if we could not comply with this, that's it, we cannot give an unmodified opinion. Now we disclaim. Hopefully this makes sense, kind of tying it back to the clean opinion because the clean opinion require sufficient appropriate evidence. And here you're saying, I could not collect those appropriate sufficient evidence. So basically, we would still say we are independent and this is the remaining of the report. This is one we disclaim. Also remember we could give a qualified opinion. Basically a qualified opinion would read something like this in the report. And our opinion, except for, just like with the qualified opinion for gap, except for this issue, we are comfortable except with this issue, except for the effect of such adjustment, if any, as might have been determined to be necessary, had we been able to examine evidence regarding the foreign affiliates and earning. It seems this company have a foreign affiliate and we could not examine the foreign affiliates and their earning. Otherwise the financial statements present fairly. Here we are giving a qualified opinion. So here we explain it a little bit further. We are unable to obtain audited financial statements in supporting the company investment and a foreign affiliates stated at 12.5 million and 11.7 for 2018, 2017, so on and so forth. So we explain the issue. So notice except as discussed above, we conclude that the audit in accordance with the standard of the PCAOB. So this is a public company. So this is basically a example of a qualified opinion. Now remember we also sometime we may not be independent. If we were not independent, we disclaim. So let's take a look at the conditions. If the auditor is not independent as specified by the AI CPA code of professional conduct, which we talked about, we'll talk about this later on. Simply put, if we are not independent, we have some type of vested interest direct or indirect with the client, but we are required by law to issue a report. A disclaimer of opinion is required under those circumstances. So once you are not independent, you simply disclaim, you simply disclaim. You may not, you might have performed all the auditing procedures and you're comfortable with them. You disclaim, you disclaim. The lack of independent also override any scope limitation. Any scope limitation, it doesn't matter. You would still, it's a disclaimer. Therefore no other reason for discriminant opinion should be cited. Just say, I'm not independent, that's it. That's good enough. You just say, I'm not independent and you move out. There should be no mention in the report on the performance of any audit procedures. You might have went through the audit, but you find out later that you are not independent. You don't say anything. You don't say, I went, you know, I did the audit and it looks good, but I'm not independent. You don't just don't say anything. Basically you would say, here we go. We are not independent with respect to this company and we do not express an opinion on them. So you don't say anything more than that. So it's easy. It's a short report. I'm not independent. I can't say anything. Although I might have did some auditing procedure. I'm comfortable with them, but I don't say anything. So this is basically disclaimer. Also this is a gas issue. Now in the next session, what I will do is I will try to summarize the various audit opinion and this way I can have put all the picture together. As always, I would like to remind you if you like the recording, please click on the like button, subscribe. Visit my website for additional resources. Studying for your CPA exam is a 20 to 30 year if not 40 year investment in your career. Take it seriously, stay motivated and be safe. Good luck.