 Hello and welcome to this session. This is Professor Farhad in which we will discuss when do the auditors give a qualified opinion or a disclaimer of opinion. Both of these opinion, qualified opinion and disclaimer opinion are not clean opinion which is unmodified or unqualified. So under what circumstances a clean opinion is not justified? Well it's very important to understand when do we give a clean opinion? When do we give a clean opinion? Well we have to have all the financial statements included in the notes. We have collected sufficient appropriate evidence which is we followed gas. Financial statements are present fairly in accordance with the gap or the framework that we are using. No circumstances requiring the addition of an emphasis of a matter paragraph or modification. Bear in mind we can add an explanatory paragraph emphasis of a matter and still give a clean opinion. We could have two issues not allowing us to give an unmodified opinion. We could have a gap issue and we could have a gas issue. The gap issues is called a statement and in the prior session we look at this. The financial statements have not been prepared in accordance with gap and the auditor disagree. This is the gap issue. The gap issue already covered and under the gap issue remember we can give a qualified just a reminder and we can give adverse and we explain when do we give a qualified when we give an adverse or we could have gas reasons generally accepted auditing standard. Here what we have is what's called the scope limitation. The scope of the audit has been restricted. What do we mean by this? Let's go back to the clean opinion. Under a clean opinion we said we have to have sufficient appropriate evidence collected to be able to issue an opinion. Well what happened if we cannot collect that sufficient appropriate evidence? We're going to have a scope limitation. Also another reason it could be the auditor is not independent. If the auditor is not independent then this is a gas issue. So if it's a gas issue what type of opinion we can give for gas we can give a qualified. Hold on a second you just said qualified for gap. Yes it could be a qualified for gap. It could be qualified for gas and we can give modified under gas. Modified under gas. When do we give a qualified? When do we give modified? Well it all depends on the severity of the situation and pervasiveness of the evidence collected. So if it's if we can live with it we can give a qualified. If not we would give a modified. Again we need to look at more examples and more details. When do we give a qualified? When do we give a modified? Before we look at additional details 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. If we are unable to obtain appropriate sufficient evidence but the auditor 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. Again 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 collect 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 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 that 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 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 on 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 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 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 we can live with that because just by circumstances we cannot observe observe ending inventory but if management if we're asking management and management is refusing then our you know 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 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 they try to trick you and that's why I keep repeating adverse is for gap okay so we cannot make 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 auditor's 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'll 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 that 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 standards as well as gap and however because of the matter described 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 going to talk about this next but that's not the issue under independence also we would give a modified opinion but the report will be very very short and we're going to see it shortly 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 state 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 farhatlectures.com and work mcqs true false to help you understand this topic better invest in yourself good luck study hard and of course stay safe