 In this presentation, we will take a look at situations where there is a departure from a standard unqualified report, a standard unqualified opinion, recalling that the standard unqualified opinion is going to be the most common opinion. That's kind of like the highest level opinion. That's what we would typically expect because we'll recall within the audit engagement. First, a word from our sponsor. Well, actually, these are just items that we picked from the YouTube shopping affiliate program, but that's actually good for you because these aren't things that we're just given to us from some large corporation, which we don't even use in exchange for us selling them to you. These are things that we actually researched, purchased and use ourselves. Acer 27 inch monitor. I've been using an Acer monitor as my primary monitor for a few years now. This is the first Acer monitor that I have used after having used a series of different brands of monitors in the past. The Acer monitor has been performing well, and I'm trusting the Acer brand more and more as I use the monitor. I have a 27 inch monitor, which I think is ideal for what I do, which is, of course, the screen recording and the editing. If you would like a commercial free experience, consider subscribing to our website at accounting instruction.com or accounting instruction.thinkific.com, where we have many different courses. You can purchase one at a time or have a subscription model, giving you access to all the courses, courses which are well organized, have other resources like Excel files and PDF files to download and no commercials. Management is basically saying the financial statements are put together in accordance with some type of standards such as generally accepted accounting principles. Our goal is to gather evidence and give an opinion on whether that is indeed the case. We would expect that hopefully management is correct that that is indeed the case. Usually it should be and therefore we would give the standard or unqualified opinion, meaning there's no qualifications to the fact that the standards, the reports do appear to us to be reported in all material respects in accordance with generally accepted accounting standards. Now, if there's a departure, that basically means that there's going to be a problem. There's some type of problem. We're departing from the unqualified report and we're going to issue something other than an unqualified report. Now remember, if this happens, then that's kind of not good. There's something that's going to be fairly significant, a fairly significant issue here requiring us to depart from what we would expect to be the normal standard unqualified report. As we consider the types of qualifications, then we're still going to think about that standard report. So you still basically just want to have that standard report kind of memorized or at least have the outline of it in your mind and then think about, okay, what would happen to it if we had an unqualified report or some of these departures to it? How do we modify that report? That's kind of how you want to think about these types of reports. And also remember, if you're going to memorize any report, you almost want to memorize at least some of the wording for the standard unqualified report. And then, of course, you want to memorize or think about those areas where there could be departures from it. You don't need to memorize every kind of report that has a departure from it. But if you know the structure of the standard report, you can kind of then think about those types of areas that would be modified to it and what type of modifications would need to be in place given these circumstances. So when might these departures happen? We could have a departure from the standard unqualified report if, and we're going to list these out here and then we'll go into more detail on them later, but the departures, if there's a scope limitation, if there's a departure from GAP generally accepted accounting principles, and if there's a lack of auditory independence, these could be issues that would require us to deviate from the unqualified opinion. And of course, remember, that means that we're assuming, of course, that the financial statements have been put together in accordance in this case with generally accepted accounting principles. If there's a significant deviation or some type of departure from it, that would be an issue because that's what our opinion is based on. So what do we do if that happens? What are the type of reports that we can issue? Well, we have the standard unqualified report. That's going to be the standard type of report. If there aren't any problems, we have the unqualified, that's the highest standard report. Then we can go to a qualified report. And the qualified report is going to be a step down from the standard report. So when you're thinking of the hierarchy of reports, I get note that the unqualified to me sounds like a funny kind of word for the highest type of report, because it sounds like to me something like someone was unqualified or something like you didn't qualify for the race or something like that. But it means you want to think of unqualified as meaning that it doesn't have any qualifications to the opinion that the financial statements are indeed in accordance with whatever standard generally accepted accounting principles as they should be. So there's no qualifications. This would be the highest report. Then we're going to say, well, there's a qualification. That's going to be the next step down. So we're going to say, we still issue a report. It's still not a terrible report here, although we would totally, we would normally expect an unqualified report. That's going to be the standard report. So a qualified report is a significant step down from an unqualified report. However, it's not completely terrible report. We're going to basically list out what that means in a bit more detail, but we'll basically say, hey, this is the qualification or the deviation for whatever reason. And that's our qualification from the standard. Then we have a disclaimer type of report, which we're going to disclaim from the opinion. And then we have the adverse report. Now, these two down here are going to be things that are not good, because if we, if we disclaim from the opinion, or we have an adverse opinion, these two types of opinions are typically not good. They're not typically going to be helpful to the company. Now we have to go where the, where the audit evident lies, of course. And if we need to issue a disclaimer or adverse opinion, that's what needs to happen. But hopefully we avoid this kind of situation at the front end, at the planning stage by taking on clients with integrity and taking on engagements that we know that we can complete. And that will hopefully limit the amount of times that we might have to a situation of disclaimer or adverse opinion, which of course is not good for anybody because typically that audit report is going to be something that's not useful for the company. And it took, it's going to take a lot of time to basically put that together on our basis in terms of the audit, on the audit information. So again, normally we want to avoid that, how we make on the front end, we make sure that we're picking up clients that are good, that have integrity within the clients and that we have the ability to complete the full service of the, of the engagement process. So a disclaimer would basically mean that we're not going to give an opinion. So we're going to disclaim from given the opinion, we basically are saying, hey, we were engaged to give an opinion, but there's some problem, possibly a scope type of limitation, which means that we can't complete. And then we have a disclaimer of the audit. That means a lot of work went into it for a disclaimer type of opinion where no opinion basically is going to be given. And then an adverse opinion is basically saying the financial statements are not in accordance with generally accepted accounting principles. So that would be saying that that would be a bad opinion, of course, because the idea here, the audit is we're giving an opinion as to whether the financial statements are in accordance with generally accepted accounting principles. Is there not, we have an adverse opinion basically saying that we don't believe with all material conditions and all material respects that the financial statements are in accordance with generally accepted accounting principles. Again, if we have an adverse opinion, that's not going to be something that's going to be useful to the company. So oftentimes, if something's going down the road of being an adverse opinion, the engagement may end before that time. And it might be terminated at some point in time. And if that's the case, then again, there's a lot of work on both sides of things, a lot of time being spent that is basically could be wasted in that kind of situation. So the bottom line is these two types of opinions are something that we would have to issue if the conditions arise, but in practice, they're not going to be the most common types of opinion. We would expect unqualified to be the most common type of opinion followed by some type of qualification where we would say, Hey, there's this one thing that's not in conformity for whatever reason, but possibly the company want things that should be reported in this way, even though it's not generally accepted accounting principles or something like that or some other type of qualification, which we can state and say, Hey, this piece we're not, we don't think is in a conformity or something like that, but the rest of it is good as a whole. That can happen to some degree. This disclaimer might end in a disclaimer type of opinion or basically terminating the engagement and adverse opinion. Typically, again, doesn't always get all the way to the end of the engagement and in a situation where you're going to end up with an adverse type of opinion. But if it does, you have that, but that's probably the most rare type of actual report that would be completed conditions required report other than unqualified. So a scope limitation, you'll recall it's one of those types of conditions that may cause us to issue a report other than an unqualified standard report results from not being able to obtain sufficient appropriate evidence about some component of the financial statements. So there's a scope limitation. We can get the information on some significant component. For example, let's say they have some part of their organization that's in another country and we can't, we don't have the resources in order to audit that. Possibly we can't get to it. Possibly we can't have another firm do it. Maybe there's regulatory limitations. That's a scope limitation. We weren't able to complete the job in that specific area. And that's going to cause us if it's significant area, if it's material to the financial statements to have some kind of qualification possibly within the reporting of the financial statements. Not in conformity with generally accepted accounting principles happens when financial statements are materially affected by a departure from gap generally accepted accounting principles. Now of course, the main what we're doing here is giving an opinion as to whether the financial statements are in conformity with generally accepted accounting principles. If there's a significant departure from them in what from what other area, then that could result in us issuing some type of qualification or some type of report other than a standard unqualified report. Auditor not independent happens when order has some form of prohibited relationship with the entity. So independence is going to be a key component when we're thinking about putting this this items together the audit together. And it needs to be independent specifically in terms of the relationship of the auditor and the client. In other words, independence isn't just something typically that will be independence in the way we conduct the audit. We also want to have appearance of independent because remember that the audit is is geared towards an independent third party. So if someone has some relation with someone in the in the organization that's significant, even if they even if they conducted the audit in an independent fashion, that the appearance is not independent. So that could cause some type of difference or some types of qualification independence is kind of a is a big deal within the auditing process. So then what would we do about it? What would happen if there was a scope limitation? Well, if there's a scope limitation, we'd have a qualified opinion or some a disclaimer of opinion, right? If it was a scope limitation, we could say, Hey, there's just one piece that we couldn't audit. And therefore we're going to have this qualification that we couldn't audit that one piece and tell the reader that. However, if it's a large piece of it's very significant, then we're just going to have to say, Hey, we couldn't we couldn't complete the audit to our satisfaction. Therefore we have to issue a disclaimer opinion given the scope limitation, not in conformity with generally accepted accounting principles, we would have a qualified opinion or an adverse opinion. So again, it depends on on the degree here. If there's one thing that wasn't in conformity with generally accepted accounting principles, and we could say, Hey, management recorded it this way possibly, and maybe they have some reason for doing that. Although we believe it's a deviation from generally accepted accounting principles, we may say, Hey, this component is a deviation from generally accepted accounting principles, we believe and the rest of the financial statements according to our testing is in conformity with financial accounting principles, we might have something like that. Or if there's a if there's a significant deviation, of course, we can't give an opinion that the financial statements and in like that's pervasive through the through the through the financial statements, we can't give an opinion that the financial statements are in accordance with generally accepted accounting principles when they are not, and therefore would have to issue an adverse opinion, which is basically like the worst type of opinion, auditor not independent. If the auditor is not independent, then we'd have to have a disclaimer of opinion, because the auditor can't basically give an opinion if they don't have that independence factor. So here's an example just just an example of how the terminology would look on the disclaimer. Remember what you want is basically to memorize the qualified audit report. And then you can kind of think through what would happen in some of these other types of deviations from that. In place of an opinion section, the auditor's report includes the section titles disclaimer of opinion on the financial statements followed by the name of the companies who financial statements the auditor was engaged to audit and a statement identifying each financial statement that the auditor was engaged to audit. This is often followed by a basis for disclaimer of opinion section in place of a basis for opinion section. So an example might be something like this disclaimer of opinion on the financial statements, we were engaged to audit the accompanying balance sheet of the company as of the date and related statements of income and cash flows as described in the following paragraph because the company did not take physical inventory and were not able to apply other auditing procedures to satisfy ourselves as to inventory quantities and the cost of property and equipment. We were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the financial statements and we do not express an opinion on these financial statements so notice we're just basically saying you know we were engaged we have this problem that happened we're not able to give an opinion on the financial statements because of it. The company did not make a count of physical inventory in the year stated in the accompanying financial statements at 28 million as of the date further evidence supporting the cost of property and equipment acquired prior to date is no longer available. The company's records do not permit the application of other auditing procedures to inventories or property plant and equipment. Basis for disclaimer of opinion, these financial statements are the responsibility of companies' management. We are a public accounting firm registered with a company accounting oversight board United States PCAOB and are required to be independent with respect to the company in accordance with the US securities laws and the applicable rules and regulations of the securities and exchange commission the PCAOB. Here's an example of a type of deviations or type of alterations of the standard unqualified report that may happen if there's a scope limitation so now we have a qualification qualified report as opposed to unqualified again think about the unqualified report and then think about the the deviation that would happen for the qualification. Standard wording for the opinion paragraph accept that a reference to the scope limitation is made example in our opinion except for the effects of such adjustments if any as might have been determined to be necessary had we been able to examine evidence regarding the foreign affiliate and earnings the financial statement present fairly in all material respects and so on and so forth so once again we have in our opinion and then this qualification given the fact that we have a scope limitation we couldn't get to this information and therefore couldn't audit it what we did audit this is my paraphrasing of this by the way what we did audit looks like it's in conformity we believe we have evidence to back up our assumption that it is in conformity with generally accepted accounting principles we weren't able to get the evidence with regards to this item and then a paragraph following the opinion paragraph will describe the basis for departure from the unqualified opinion we were unable to obtain an audited financial statement supporting the company's investments in foreign affiliates stated at 10 million at date or its equity in earnings of that affiliate of 1 million which is included in net income for the years then ended as described in note 7 to the financial statements so obviously we'll refer to the note the note will give more information on this but it's significant enough for us to put it in the audit report here we were also not able to satisfy ourselves as to the carrying value of the investments in the foreign affiliate or the equity in its earnings by other auditing procedures