 Hello and welcome to the session. This is Professor Farhad. In this session, we would look at the audit report when the unmodified opinion is not justified. It means we cannot give a clean opinion. This topic is covered in auditing and attestation course, the CPA exam auditing section definitely tested on the CPA exam. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you'd need to subscribe. I have 1,600 plus accounting, auditing, tax and finance lectures. This is a list of all the courses that I cover. If you like my lectures, please like them. Click on the like button. It doesn't cost you anything. Share them. Put them in playlists. And these days with the coronavirus out there, share them with other students. They might be helpful. If they're helping you, it means they might help other people and please connect with me on Instagram. If you are studying for your CPA exam, please, I strongly suggest you visit my website as I have more resources for your auditing exam, CPA questions, as well as multiple choice and other resources. Take your CPA exam seriously because it's going to make a difference in your career down the road. So the first thing we're going to look at is conditions for unmodified or what's called the clean or unqualified opinion because we talked about this earlier. So first you want to know when is a clean opinion acceptable? Well, we have to have four conditions. One is we include all the financial statements. We collected sufficient appropriate evidence. We accumulated that evidence. The financial statements present fairly with gap or other framework that we are using and no circumstances requiring the addition of an emphasis of a matter or modification. So under those circumstances, we can give you unqualified opinion. Also sometime we might use an explanatory paragraph, but even with an explanatory paragraph, we talked about in the prior session under five different five circumstances, we might do so, but we could still issue an unqualified opinion. So we could have explanatory paragraph, but the opinion still unmodified or clean. When is an unmodified or clean opinion is not, we cannot give it is not justified. Well, what I'm going to do, I'm going to break down the reasons into two grand category, two categories. One is gap. It could be a gap problem. It could be a gas problem. The gap problem simply put the financial statements are not prepared in according with gap and obviously the auditor disagree, because sometime we could give them a pass if it's not a big deal. Gas issues is we did not, we were not able to collect enough appropriate evidence. Now we have a scope limitation. We could not remember to have an unmodified opinion. We have to collect enough evidence sufficient and appropriate here. We could not. And also the auditor may not be independent. In this session, I'm going to focus on the gap issue. This way in the next session, I will talk about the gas. Basically, what could be some gap issues? What could be some gap issues that it would allow us to give an opinion that's not modified or it will force us to give an opinion that's not modified? One is change in gap. Can you change gap? Sure, you can. But if we disagree and if the client keep on changing their method, then we cannot give an unmodified clean opinion. Also, the client is not disclosing enough information. Disclosure is not enough or simply put, you are departing from gap. You are not using gap. And also we disagree because sometime the auditor, remember in the prior session, under certain circumstances, we might depart from gap a little bit and have an explanatory paragraph that here, that's not the case. Misapplication of gap, you're not using gap properly. You are using unreasonable estimate and the auditor obviously disagree because we use estimate all the time. And under those circumstances, what opinion can we give? What opinion can we give if we are not giving a clean opinion? There are three opinions that we can give. We can give a qualified opinion. We can give an adverse opinion and we can give a disclaimer. The first thing I want to let you know is the disclaimer is not a gap issue. Therefore, you don't have to worry about disclaimer in this recording. We're left with either you can give a qualified or adverse. When do you give a qualified opinion? You give a qualified opinion when the issue is material, but not severe or pervasive. So simply put, the issue is limited to a certain area and we can live with that. In the grand scheme of things, we can live with that. Therefore, we give a qualified opinion. So qualified is not good as unqualified, but we can live with that. Adverse opinion is serious. The issue is material and severe and severe and pervasive. Here, the issue is serious. And what happened under those circumstances most of the time, the company will fix the issue because you don't really want to get an adverse opinion because adverse opinion are no good. So the company will fix the issue and maybe we'll go back to unqualified because that's what you want to do. Now, the best way to illustrate this is to look at an example. So let's first take a look at an audit report that is issued that's considered a qualified opinion. And this is how we state our opinion. So standard wording for the opinion except for the addition of qualifying language. So here's what you do is you're going to be using what's called except for qualifying language. So let's take a look. In our opinion, so the report is the same, the first paragraph. But when you come to the opinion, you'd say in our opinion, except for, so notice here what's happening, except for the effect of not capitalizing certain lease obligation as discussed in the following paragraph. So here what you're saying is in our opinion, except for that, the statements present fairly in all material respect and you list the financial statements. Then immediately after that, you have to explain what happened. And here what happened, the company has executed from property from property and debt in the balance sheet, the lease obligation. And in our opinion, in the auditor's opinion, those lease obligations should be reported as assets and liabilities, but the client did not do that. And they say, if these if lease obligation will recognize, then they would show you what the property would have been, what the debt would have been, what income would have been, and what earnings per share would have been. So they tell you what the problem is, except for that. And they tell you the effect if the company indeed followed the proper procedures. This is a qualified opinion. Notice it's except for. Here you have really a bad opinion, you have an adverse opinion. Here in our opinion, because the effect of the matter discussed in the following paragraph, the financial statements do not present fairly. And this is the kiss of death. This is the adverse opinion in conformity with GAP. Oftentimes it's the kiss of death. And here what happened, usually the company will fix the error. If not, then they have a serious problem. So here we go. After the opinion, they will show you, they will tell you exactly what they did as discussed in note 6 and the financial statements, the company carries its property, plant and equipment at a praised value. That's a no-no. You cannot issue, you cannot report your property, plant and equipment at a praised value. Because GAP, if you're following GAP, it requires you to state those property, plant and equipment, not an excess of cost. You can reduce it by depreciation, but they cannot be at a praised value. Then they tell you a little bit more about because of the departure identified above. Inventory has been increased. So they tell you the effect of the financial statements. And the remaining of the report, yet from the auditor is unqualified reported. It's just the remaining of the report is the same as unqualified. But here you gave them an adverse opinion. So hopefully, now you understand under what circumstances we give a qualified and adverse and I showed you two examples. In the next session, what we would look at is also unmodified opinion where it's not justified, but specifically we're going to be looking at gas issues. Because in this session we look at GAP, we're going to look at gas. 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