 Hello and welcome to the session in which we will discuss qualified opinion and disclaimer. Qualified opinion and disclaimer are not clean opinion. They are not unmodified opinion. Unmodified means clean opinion. So it's very important to go back and review under which under which condition we can give an unmodified or clean opinion. Well, include all financial statements. We have collected sufficient appropriate evidence. We need this for the unmodified clean opinion. The financial statements present fairly in accordance with GAAP or the other framework IFRS or whatever framework we are using. We are in compliance for no circumstances requiring the addition of an emphasis of a matter paragraph or modification. Now we could have an explanatory paragraph, but that's optional emphasis of a matter or other matter. That's fine. And we looked at this in prior session before we proceed any further. I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead. Start your free trial today. No obligation. No credit card required. There are two main reasons why we cannot give an unmodified opinion or unmodified opinion is not justified. We could have a GAAP reason and we could have a GAAS reason. What is a GAAP and what's a GAAS? Well GAAP means we have a financial statement issue. We have a misstatement. The financial statements are not prepared in accordance with GAAP, the framework, and obviously the auditor disagreed. And we looked at these conditions in the prior session. And under those conditions we can give qualified opinion or we can give adverse. When do we give qualified opinion? When do we give an adverse opinion? It all depends on the severity and pervasiveness of the issue. We looked at this topic in the prior session. In this session we would look at GAAS issues. Remember GAAS is field work. Remember in order to issue unqualified opinion you have to have sufficient appropriate evidence. What if that's not the case? Then you have what's called a GAAS issue. So a GAAS issue sometime is called, not sometime, it's also called a scope limitation. The scope of the audit has been restricted. We have a scope limitation. Well if that's the case, if we have a scope limitation we could give a qualified opinion. Hold on, didn't you just said we could give qualified under GAAP? Yes, we can give qualified under GAAP and we could also give qualified under GAAS. Or we can give a disclaimer. Well when do we give a disclaimer, when do we give qualified? Basically the same concept as under GAAP depending on the severity and pervasiveness of the issue. And we'll discuss this in details. So we need to be aware that if the auditor is not independent from the client, if there's an independence issue, well what do we have to do? We will disclaim or we could just simply withdraw from the engagement. If we are unable to obtain appropriate sufficient evidence but the auditor can conclude that the possible effect of the material misstatement could be material. So they are material, it's a material but not severe and pervasive. Then what is severe or pervasive? Severe or pervasive means it's affecting the financial statement overall. Well if that's not the case then we can live with it. We have a scope limitation but it's not severe. It's not affecting our judgment for the whole financial statement. Under those circumstances we would give a qualified opinion. So the issue is material, we cannot obtain appropriate evidence but not severe. It's limited to a certain area. Under what circumstances? What are some examples? Well some examples of the scope of limitation is time constraints. We did not have enough time but we believe we did enough work to be comfortable giving a qualified opinion and we have to qualify it. Or we are unable to observe inventory, well at the beginning of the year when the company counted the beginning inventory we were not there. That's okay, we can live with their beginning inventory but we're going to have to qualify. Maybe we were unable to or cannot confirm a count receivable. Maybe the count receivable is not very large. Maybe it's not, maybe we can't find alternative procedures. Maybe we can live with it. We can live without confirming a count receivable because it's confined to a particular area. The issue is confined to a particular area. For example we were unable to obtain an attorney letter but we can live with that. We don't believe this company is exposed to a lot of lawsuits. Maybe we can live with that or to major ones. Accounting record is not adequate. Again depending on under what circumstances maybe we can live with that, maybe not. So in the question that you'll be looking for was it severe or not severe, severe or pervasive. If it is you have an issue. Now we have to ask ourselves are we confined or restricted or is management placing restriction on us. Now bear in mind if management is placing restricting on us then we have to be very careful because they could be hiding something. Now if we did not have enough time or for technical reasons we could not absorb inventory that's different. But if management is refusing, is restricting us then it's an issue. So if we're restricted by circumstances that's fine. We can live with that because just by circumstances we cannot absorb ending inventory. But if management, if we're asking management and management is refusing then we should raise a lot of red flags on that. So what should we do? The first thing we should do is we should ask management to comply and if they don't we should ask the board of directors or the audit committee to put pressure on them. So this is the qualified. When do we give disclaimer? If the issue is material and notice and severe and pervasive. So we could not collect enough evidence and we believe the evidence is affecting the overall financial presentation. It's not limited to one area under those circumstances we disclaim. Remember not adverse, remember adverse is for gap and again they try to trick you and that's why I keep repeating adverse is for gap. So we cannot collect enough evidence therefore we cannot make a decision. What do we do? We disclaim. So one more time we disclaim for gas we give an adverse opinion for gap and gas as well as gap they both have a qualified opinion. So both they could have a qualified opinion simply put as long as the issue is confined whether it's gap or gas if the issue is confined we can give a qualified opinion. Let's take a look at an actual report disclaimer of opinion. Well this is what it looks like basically we have an independent orders report disclaimer of opinion we just tell you right there we are disclaiming. Now we say we are we were engaged to audit because we did the work that's how we find out we could not collect enough evidence. Remember this is the introductory paragraph of the unmodified report that's fine. Here we go. Here's our opinion. We do not express an opinion on the financial statements of Adam company because of the significance of the matter described for the basis of disclaimer opinion so we're going to have a paragraph called basis for disclaimer opinion and we explained what we could not do. We have not been able to obtain sufficient appropriate evidence to provide a basis for the audit opinion. Remember that's one of the reasons to be able to to give the users to give the users it means give the shareholders the stockholders the users of the report a clean opinion you have to collect evidence. We could not collect evidence and we will explain what the issue is in the basis for disclaimer we would still put responsibility of management responsibility of the auditor and here we we put down our responsibilities to conduct an audit of the financial statement according to gas generally accepted auditing standard and however because of the matter describe of the basis in the basis of the disclaimer of opinion we were not able to obtain sufficient appropriate evidence again we emphasize this point we were not able to obtain appropriate sufficient evidence we also mentioned that we are independent of Adam company so the the issue is not independence because we could we could have independence issue and we're gonna talk about this next if the auditor is not independent but is required to assure report then under those circumstances the auditor will disclaim disclaim an opinion no other reason for disclaiming should be cited simply put once you lack independence then guess what you do you disclaim you don't mention anything about scope limitation if it exists if you are restricted or not it doesn't matter independence will override scope limitation also you don't mention any audit procedures that the auditor undertake and sometimes what happens is the auditor might have performed all the necessary auditing procedures nevertheless you don't mention anything no scope limitation no auditing procedures you perform whether they were acceptable or not you don't mention anything simply put you will say the following we are not independent with respect to Adam company therefore as a result we don't express an opinion it's as simple as that we don't say anything else we don't want to bias the perception of the users we don't also want to bias the perception of the next auditor why because if you mention anything about scope limitation or auditing procedures were successfully completed then guess what you are already biasing their perception and you should not be doing that because you are not independent simply put you would say I am not independent I disclaim as simple as that what should you do now go to farhat lectures calm and work MCQs true false to help you understand this topic better invest in yourself good luck study hard and of course stay safe