 Hello and welcome to this session in which we will discuss when a clean or un-modified or unqualified opinion is not justified and specifically I'm going to be discussing when do the auditor gives you a qualified opinion or an adverse opinion. It's very important to remember when is a clean or unmodified opinion is justified or unmodified or unqualified. Well first we are including all the financial statements we collected sufficient appropriate evidence simply put by following gas we collected all the evidence necessary. The financial statements present fairly in accordance with gap or other framework whether that framework is IFRS or something else and no circumstances requiring the addition of an emphasis of a matter or modification. Now bear in mind we can have an explanatory paragraph emphasizing of a matter and still give a clean opinion but now we need to discuss when this clean opinion this unmodified or unqualified is not justified. Usually there are two reasons one is a gap reason. Gap reason means there is a misstatement and there is a gas reason which is basically not collecting sufficient appropriate evidence. In this session I'm going to be focusing on the misstatement on the gap in the next session we would look at gas under gap simply put the financial statements have not been prepared in accordance with gap and obviously the auditor disagree. So when that happens when the financial statements are not prepared according to gap what can the auditor do well first the auditor can ask the company to change if they don't change we have two options listen to me carefully under gap we have two options other than unmodified the auditor can give a qualified opinion the auditor could give an adverse opinion disclaimer of opinion do not apply here so disclaimer don't apply under gap now the best way is to look at some examples to show you when do gap happens when do gap misstatement happen under what circumstances now also we may not be able to give a clean opinion for reasons other than gap which are gas generally accepted auditing standards under those circumstances we are dealing with the scope or the scope limited limitation or if we are not independent we will discuss this topic in the next session but the best way to proceed from here is to look at some examples of gap misstatement now before we look at some examples I would like 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there's a material misstatement there and we disagree they're not giving enough there could be a departure from gap and the auditor disagree again sometime you can depart from gap and it should be so minor you don't have to worry about it but here we are disagreeing it could be MS application of gap we are not applying gap properly the company could be making an unreasonable estimate and obviously the auditor disagree and all of them and all these issues those issues are material and the auditor disagree so keep that in mind okay what opinion we should give if that's the case those are gap issues again we can give a qualified or we can give adverse now when do we give a qualified when do we give adverse we give qualified if the issue is material so remember they're all material but not severe or pervasive now what does it mean being severe or pervasive well it means not severe and pervasive means the problem is limited to a certain area okay not limited it becomes severe so so if so what's the definition of severe or pervasive the definition of those is the issue is not limited to a certain area but when we don't consider them severe or pervasive it means they are they are limited they are limited to a certain area or substantial portion of the financial statements are affected if that's the case they are severe and pervasive if not a substantial portion then they are not severe and pervasive also they are severe and pervasive if the user's understanding of the financial statements is changing there's a fundamental issue in understanding the financial statements if that's the case if the issue is that if that large it becomes severe and pervasive so as long as it's not severe and pervasive we can give a qualified opinion and what's it when do we give an adverse guess what it's material severe or pervasive severe and pervasive are the same severe means not limited to a certain area or it's it's covering a substantial portion of the financial statements or you are having a major misunderstanding of the financial statements because of this issue here you would give adverse adverse is a bad opinion adverse is the kiss of death so again if there's a gap issue you have two options qualify or adverse so you first you know qualified is not as bad as adverse but in most situation the company will fix the problem and they want to have an unqualified opinion so most of the time the company fix the issue before the financial statements are issued disclaimer is not a gap issue remember disclaimer is not a gap issue we're going to see disclaimer next when we discuss gas because we are dealing with gap now the best way to kind of look at this is to look at an actual report to see how the report is when it comes to qualified and adverse the reason is this is important because I showed you how the clean opinion looks like so as far as the qualified report the introductory paragraph management responsibility the auditor's responsibility don't change okay so we have a qualified opinion notice we are it's not only an opinion it's a qualified opinion same introductory paragraph as the standard unmodified report the introductory is the same but here here's what we say in our opinion except for the effect of the matter described in the basis of the qualified opinion and this is the basis of the qualified opinion the accompanying financial statement present fairly well what does that mean it means overall they present fairly except for one or more than one issue but except for one issue and they're telling you look under the basis for the qualified opinion and you will see what that what that issue is and let's see what that issue is basis we're going to have a basis for the qualified opinion if we have a qualified opinion we have to tell you why we are giving this qualified opinion otherwise you'll be like okay so tell me more why is it qualified well the company has excluded from property and that in the accompanying balance sheet certain lease obligation that is in our opinion should be capitalized simply put they did not capitalize an asset and the liability in conformity with gap but what we are thinking is this issue is not severe or pervasive simply put this issue is limited to a certain area of the financial statements and we can live with it and what they do they will tell you if those were capitalized what would happen to the assets what will happen to the liability what will happen to retained earnings and what will happen to income and earnings per share okay we believe notice here I want I want I want to emphasize this statement we believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis of the for the qualified audit opinion simply put we did collected enough evidence so it's not an evidence issue it's not a gas issue it's not it's not a procedure to collect the evidence we collected the evidence all what we're saying is everything looks good overall except for this and as a result we're not going to give unqualified we're going to give a qualified opinion and the remainder of the report is the same as the standard unmodified opinion now let's take a look at an adverse opinion we're going to have the same introductory paragraph in the opinion section of the standard but notice it says adverse opinion hold on a second pay attention this is bad in our opinion because of the significance of the matter discussed in the basis of the adverse opinion and we're going to have a paragraph called basis of adverse opinion explaining why maybe the same issue that we thought it's not pervasive and severe in the previous slide now we believe it is therefore we give an adverse opinion so in the basis of the in the in the basis for the adverse opinion section of our report the accompanying financial statement notice here do not present fairly notice in the on the prior slide it said it present fairly except here it doesn't present fairly and this is the case of death you don't want this you don't want the auditor to be issuing such a report so the same wording as the first paragraph as the qualified opinion for the basis of the adverse opinion and we believe notice we believe the audit evidence we have obtained is sufficient and appropriate now why do I keep saying this I want to emphasize the point that we have a gap issue here not gas because gas deals with evidence sufficient and appropriate evidence matter of fact in the next session we would look at gas where we have a scope limitation so that's why I'm emphasizing this so this is what an adverse report looks like now what should you do now go to farhatlectures.com and work mcqs and true false that's going to help you understand these topics whether you are studying for your accounting course or your cpa exam invest in yourself invest in your career good luck and study hard