Audit Opinion: 4 types | Unqualified & Unmodified Opinion | Qualified Opinion | Adverse Opinion

Summary

In this session, Professor Farhad discusses various audit opinions, focusing on the CPA exam's auditing section. He outlines four types of audit opinions: unmodified (clean), qualified, adverse, and disclaimer. He explains the conditions for an unmodified opinion and when to use explanatory paragraphs. Farhad also covers situations leading to modified opinions, emphasizing materiality and pervasiveness. He advises connecting on LinkedIn, subscribing on YouTube, and visiting his website for more resources, encouraging students to take their CPA exam preparation seriously.

Takeaways

• 👨‍🏫 The session is led by Professor Farhad, focusing on summarizing audit opinions covered in the playlist.
• 🔗 Professor Farhad encourages connecting with him on LinkedIn and subscribing to his YouTube channel for more accounting, auditing, tax, and finance lectures.
• 📚 The playlist includes a comprehensive list of courses, particularly beneficial for CPA exam preparation.
• 📈 There are four types of audit opinions: unmodified (or unqualified/clean), qualified, adverse, and disclaimer.
• 🟢 An unmodified opinion with an explanatory paragraph is still considered unmodified but highlights additional information for users.
• 🔍 Conditions for a clean unmodified opinion include complete financial statements, sufficient appropriate evidence, fair presentation, and no need for emphasis on any matter.
• 🚫 If an unmodified opinion isn't justified, auditors consider departures from GAAP, restrictions by the client, or lack of auditor independence.
• 📉 Materiality and pervasiveness of issues determine the type of opinion given: qualified for material but not pervasive issues, adverse for material and pervasive issues.
• ❌ A disclaimer opinion is issued if the auditor is not independent, regardless of materiality.
• 💼 Professor Farhad's website, Forhad Lectures, offers additional resources for CPA exam preparation.

Q & A

What are the four types of audit opinions mentioned in the script?

The four types of audit opinions mentioned are unmodified (or unqualified), qualified, adverse, and disclaimer.

What is an unmodified opinion with an explanatory paragraph?

An unmodified opinion with an explanatory paragraph is still an unmodified opinion, but it includes additional information that the auditor believes is important for users to know, such as a lack of consistency in the application of GAAP, substantial doubt about going concern, or emphasis of other matters.

What are the conditions required for an unmodified or unqualified audit opinion?

For an unmodified or unqualified audit opinion, four conditions are required: all financial statements are included, there is sufficient appropriate evidence, the financial statements present fairly within the framework being used, and there are no circumstances requiring additional emphasis of a matter or paragraph.

What is the difference between an adverse opinion and a disclaimer of opinion?

An adverse opinion is issued when there is a material and pervasive GAAP issue that the auditor does not agree with. A disclaimer of opinion is issued when the auditor is not independent, which is a general standard issue, and materiality is not a consideration in this case.

Why might an auditor issue a qualified opinion?

A qualified opinion is issued when there is a material departure from GAAP that is not pervasive to the entire financial statements, or when there is a scope restriction imposed by the client that is material but not pervasive.

What does it mean for an issue to be 'material but not pervasive'?

An issue is considered 'material but not pervasive' when it significantly affects the financial statements but does not impact the overall presentation to such an extent that it would change the overall opinion from unmodified to adverse or disclaimer.

How does the auditor's independence affect the audit opinion?

If an auditor is not independent, it is a general standard issue, and a disclaimer of opinion is issued regardless of the materiality of the issue, as independence is a fundamental requirement for an audit.

What should a candidate do if they find the script's content helpful for their CPA exam preparation?

A candidate should consider subscribing to the YouTube channel, liking the lectures, sharing them, and checking out the website for additional resources to supplement their CPA exam studies.

What is the significance of the color red used for the words 'adverse' and 'disclaimer' in the script?

The color red is used to reflect that adverse and disclaimer opinions are unfavorable and indicate significant issues with the financial statements or the audit process.

What additional resources does Professor Farhad recommend for CPA exam preparation?

Professor Farhad recommends visiting his website, forhadlectures.com, for additional resources, including lectures and materials specifically designed to support CPA exam candidates.

Outlines

00:00

📚 Introduction to Audit Opinions

Professor Farhad begins the session by introducing the topic of audit opinions covered in the playlist within an auditing and attestation course. He emphasizes the importance of connecting with him on LinkedIn and subscribing to his YouTube channel for over 1600 accounting, auditing, tax, and finance lectures. He also invites viewers to like, share, and utilize his lectures for educational purposes. The professor then outlines the four types of audit opinions: unmodified (also known as unqualified or clean), qualified, adverse, and disclaimer. He explains that an unmodified opinion can have a sub-opinion with an explanatory paragraph, which still indicates an unmodified opinion but draws attention to additional matters. The conditions for a clean unmodified opinion are also discussed, which include the presence of all financial statements, sufficient appropriate evidence, fair presentation in accordance with the framework, and no circumstances requiring additional emphasis.

05:01

🔍 In-depth Analysis of Non-Unmodified Audit Opinions

In the second paragraph, Professor Farhad delves into the scenarios where an unmodified audit opinion cannot be given and what alternative opinions might be issued. He discusses the three possible issues that could lead to a non-unmodified opinion: a departure from Generally Accepted Accounting Principles (GAAP), scope restrictions imposed by the client, and a lack of auditor independence. The professor explains that the materiality and pervasiveness of the issue determine the type of opinion issued. If the issue is material but not pervasive, a qualified opinion is given. If the issue is both material and pervasive, an adverse opinion is issued for a GAAP departure, and a disclaimer is given for a lack of independence, regardless of materiality. The summary concludes with a reminder to like, share, and subscribe for more CPA exam resources and a wish for the viewers' success and safety.

Keywords

💡Audit Opinion

An audit opinion is the auditor's professional assessment regarding the fairness and accuracy with which a company's financial statements reflect its financial condition. In the video, Professor Farhad discusses the different types of audit opinions, which are crucial for understanding the CPA exam's auditing section. The script mentions 'unmodified', 'qualified', 'adverse', and 'disclaimer' opinions, each reflecting varying degrees of assurance about the financial statements' compliance with Generally Accepted Accounting Principles (GAAP).

💡Unmodified Opinion

An unmodified opinion, also known as a 'clean' opinion, is given when the auditor concludes that the financial statements are presented fairly, in all material respects, and in accordance with GAAP. The script indicates that this is the most favorable type of audit opinion. An example from the script is 'unmodified with explanatory paragraph', which still falls under the unmodified category but includes additional information the auditor deems important for users to understand.

💡Qualified Opinion

A qualified opinion is issued when the auditor has a disagreement with the company's accounting practices, but the impact is not so severe as to warrant an adverse opinion. The script explains that this opinion is given when there is a 'departure from GAAP' that is material but not pervasive. The video emphasizes that this type of opinion indicates some issues with the financial statements that require the user's attention.

💡Adverse Opinion

An adverse opinion is the most severe type of audit opinion and is issued when the financial statements are materially misstated or do not comply with GAAP to such an extent that the statements are not fairly presented. The script states that this opinion is given when there is a 'gap issue' that is both material and pervasive, indicating a significant deviation from the standards that affects the entire set of financial statements.

💡Disclaimer of Opinion

A disclaimer of opinion occurs when the auditor is unable to form an opinion due to significant scope limitations or lack of independence. The script notes that this is a 'gas issue' and is issued regardless of materiality, suggesting that the inability to provide an opinion is due to circumstances beyond the financial statements themselves, such as auditor independence.

💡GAAP (Generally Accepted Accounting Principles)

GAAP is a set of standardized accounting rules that companies in the United States must follow when preparing their financial statements. The script discusses GAAP in the context of audit opinions, emphasizing that adherence to GAAP is a prerequisite for an unmodified opinion. Any departure from GAAP, as mentioned in the script, can lead to a qualified, adverse, or disclaimer opinion.

💡Materiality

Materiality refers to the significance of an item or discrepancy that could impact a user's understanding of the financial statements. The script explains that the level of materiality and pervasiveness of an issue determine the type of audit opinion. If an issue is material and pervasive, it could lead to an adverse or disclaimer opinion, whereas a material but not pervasive issue might result in a qualified opinion.

💡Pervasive

Pervasive issues are those that affect the entire set of financial statements, as opposed to being limited to a specific account or note. The script uses the term in the context of materiality, indicating that if a GAAP departure is both material and pervasive, it would lead to an adverse opinion. This term is crucial for understanding the severity of the issues that can affect an audit opinion.

💡Explanatory Paragraph

An explanatory paragraph is additional information provided in an unmodified audit opinion to highlight a matter that, while not affecting the overall fairness of the financial statements, is important for users to be aware of. The script mentions that an unmodified opinion with an explanatory paragraph is still considered unmodified but includes extra information, such as a lack of consistency in the application of GAAP or substantial doubt about a company's going concern.

💡Going Concern

A going concern refers to the ability of a company to continue operating in the foreseeable future without the need to liquidate or significantly curtail its operations. The script discusses 'substantial doubt about going concern' as a reason for including an explanatory paragraph in an unmodified opinion. If there is significant doubt about a company's ability to continue as a going concern, this must be communicated in the auditor's report.

💡Independence

Independence in the context of auditing refers to the auditor's freedom from conditions that could affect their objectivity or impartiality. The script mentions that if an auditor is not independent, a disclaimer of opinion must be issued. Independence is a fundamental principle in auditing, and a lack of it can significantly undermine the credibility of an audit opinion.

Highlights

Introduction to the session by Professor Farhad on audit opinions.

Emphasis on the importance of connecting with Professor Farhad on LinkedIn and subscribing to his YouTube channel.

Mention of over 1600 accounting, auditing, tax, and finance lectures available.

Encouragement to like, share, and put lectures in playlists if they are beneficial.

Invitation to connect with Professor Farhad on Instagram for educational supplementation.

Introduction of the website hadlectures.com for additional CPA exam resources.

Discussion of the four types of audit opinions: unmodified, qualified, adverse, and disclaimer.

Explanation of the term 'unmodified opinion' and its sub-opinion 'unmodified with explanatory paragraph'.

Differentiation between 'adverse' and 'disclaimer' opinions based on the severity of issues.

Conditions required for a clean unmodified or unqualified audit opinion.

Description of the circumstances under which an unmodified opinion with an explanatory paragraph is given.

Detailed explanation of the materiality and pervasiveness of issues affecting audit opinions.

Guidance on the type of audit opinion to give based on the materiality and pervasiveness of GAAP departures.

Clarification on the necessity of an adverse opinion for material and pervasive GAAP issues.

Discussion on the automatic issuance of a disclaimer opinion when auditor independence is compromised.

Summary of the audit opinion types and their usage, aimed at helping CPA exam candidates.

Closing remarks with a call to action for subscribing, liking, and sharing the content for CPA exam preparation.

Transcripts

hello and welcome to the session this is

Professor Farhad in this session I will

look at a summary basically a conclusion

of the various audit opinion that we

cover in this playlist this topic is

covered and auditing and attestation

course the CPA exam auditing section as

always I would like to remind you to

connect with me on LinkedIn if you

haven't done so YouTube is where you

would need to subscribe I have 1600 plus

accounting auditing tax and finance

lectures this is a list of all the

courses that I cover including CPA

questions if you like my lectures please

like them click on the like button it

doesn't cost you anything

shared them put them in playlists if

they benefit you it means they might

benefit other people so share the wealth

and please connect with me on Instagram

if you are looking to supplement your

education please check out my website

for had lectures comm for additional

resources especially if you're studying

for your CPA exam it's a 30 year

investment in your career take it

serious the first thing we're gonna look

at is the four types of audit opinion

which are unmodified you know or

unqualified depending whether you're

using the AICP or the PCAOB language or

clean opinion and with this opinion we

have a sub opinion of it it's called

unstow unmodified with explanatory

paragraph simply put it's unmodified

opinion that's the first opinion then we

have a qualified opinion then we have

adverse opinion then we have this claim

notice the adverse and the disclaimer

are in red to reflect that they are no

good now da we why do we use adverse vs.

disclaimer we're gonna see later that

adverse is when you have a gap issue and

we're gonna we explain this much much

more in detail in the explanation

session and disclaimer is a gas issue so

now so again all this opinion I went

over in detailed in separate session

check out the playlist for this for this

session what are the condition for the

clean unmodified or unqualified opinion

we need four conditions for this one is

include all the financial statements -

we have to have sufficient appropriate

evidence so the financial statements are

all there we have sufficient appropriate

evidence the financial statements

present fairly with

or the framework that we are using and

for no circumstances requiring the

additional emphasis of a matter or

paragraph so this is the cleanest kind

of clean-cut nothing to worry about

now again with unmodified or unqualified

we have unmodified opinion with

explanatory paragraph we are still

unmodified the only thing here we are

pointing out to something else we want

to we want the users to know about

something else what that could be such

that something else it could be lack of

consistency in the application of gap

but we agree but lack of consistency we

have to show it auditor agree with the

departure from the accounting principle

door so departure but we still agree

substantial doubt about going concern we

have a go there's a going concern issue

emphasis of other matters and reports

involving other auditors and here we use

revised wording now these topics I

covered them much much more in details

each one of them I'm just giving you a

summary of all the audit opinions so if

you want to know about this about these

explanatory paragraph please see the

recording output the playlist I'll put

the link for the playlist in the

description now now what happened if we

don't give unmodified opinion if we

don't give unmodified opinion now we

have to look at what other opinion can

we give because unmodified is not

justified here we're gonna have three

circumstances we could have a departure

from GAAP financial statements are not

prepared according to GAAP and the

auditor disagree because remember here

and one of the paragraph there's a lack

those auditor agree to a departure from

the accounting principle here we we

don't agree so we call this a gap issue

we could have schoo prescription either

by the client or other circumstances and

if it's by the client it could be a

major issue this is a gas generally

accepted or the things standard issue

and the auditor may not be independent

is not independent this is also a gas

issue so we could have three three

issues when we when we don't give

unmodified or clean opinion now when

that's the case what opinion do we give

well then we have to look at the

materiality of the issue if the the

issue could be material so the gap issue

could be material but not pervasive to

the whole

to the sick to the statement as a whole

or the issue could be material and

pervasive to the whole financial

statements so the next thing we look at

is the level of materiality and

pervasiveness now if it's not Material

we don't have to worry about it

obviously we only have to worry if it's

material and if it's material is it

pervasive pervasive or not the race of

or not so so if we have a gap issue

simply put we're not following up and

it's not pervasive easy we give a

qualified opinion so basically we say

the opinion except for this issue looks

good and we looked at this we looked at

this opinion much much more in detail in

a separate recording also the scope if

there's a scope or restriction by the

client but the issue is material but not

pervasive it's to a specific area and

the financial statements then we give a

qualified opinion so that's easy so

qualified when it's material but not

pervasive now if the issue of the issue

is gap its material and pervasive then

we give an adverse opinion if it's

material and pervasive if it's a gas

issue material and pervasive we give a

disclaimer we give a disclaimer now we

are left with auditor is not independent

it's a gas issue whether it's material

or not material here we disclaim whether

it's material or not whether it's

material or not materiality is not an

issue here if you are not independent if

you are not independent you disclaim you

disclaim so those are the opinion and

when we use them this is a summary

hopefully it will be very helpful if

you're studying for the CPA exam as

always if you like my recording please

like them share them put them in

playlists subscribe and if you're

studying for your CPA exam I strongly

suggest you check out my website for

additional resources good luck and study

hard and stay safe