Modified Audit Opinion | GAAS| Disclaimer Opinion | Qualified Opinion | Scope Limitation | CPA Exam

Farhat Lectures. The # 1 CPA & Accounting Courses
19 Mar 202011:01

Summary

TLDRIn this educational session, Professor Farhad delves into circumstances where an unmodified audit opinion is unjustified, focusing on 'GAS' issues—scope limitations and auditor independence. He contrasts 'GAS' with 'GAP' issues, explaining that while GAP refers to financial statements not prepared in accordance with GAAP, GAS involves restrictions on the audit's scope or a lack of auditor independence. Farhad clarifies that GAS issues can lead to either a qualified opinion or a disclaimer of opinion, depending on the severity and pervasiveness of the issue. He also emphasizes the importance of auditor independence, stating that a lack of it mandates a disclaimer of opinion. The session is designed to prepare students for the CPA exam, providing insights into audit opinions and their implications.

Takeaways

  • 📚 The session is led by Professor Farhad, focusing on when an unmodified opinion is not justified, particularly in the context of 'GAS' (scope limitation or auditor's lack of independence) issues.
  • 🔗 The discussion complements a prior session on 'GAP' (non-compliance with GAAP) issues, emphasizing the distinction between the two types of issues.
  • 🎯 For an unmodified (clean) opinion, auditors must include all financial statements, obtain sufficient and appropriate evidence, and ensure fair presentation in accordance with GAAP.
  • 🚫 'GAS' issues arise from scope limitations or auditor independence problems, leading to either a qualified opinion or a disclaimer of opinion.
  • 📉 A qualified opinion is given for GAS issues when the scope limitation is material but not severe or pervasive, allowing the auditor to still form an opinion.
  • ❌ A disclaimer of opinion is issued for GAS issues when the scope limitation is both material and severe or pervasive, preventing the auditor from forming an opinion.
  • 🕒 Examples of scope limitations include time constraints, inability to observe inventory, or confirm account receivables, with the severity determining the type of opinion.
  • 🏢 Management restrictions on the audit can also lead to GAS issues, where auditors must escalate to higher authorities like the Audit Committee to resolve.
  • 🚫 If auditors are not independent, a disclaimer of opinion is mandatory, regardless of the audit findings or any other scope limitations.
  • 🔄 The session concludes with a reminder of the importance of understanding the difference between GAS and GAP issues for the CPA exam, as they lead to different types of audit opinions.

Q & A

  • What is the main topic of discussion in Professor Farhad's session?

    -The main topic of discussion is when an unmodified opinion is not justified, specifically focusing on 'gas' issues in auditing and attestation, which is typically covered in the CPA exam.

  • What does 'gas' stand for in the context of auditing?

    -In the context of auditing, 'gas' stands for 'scope limitation', which refers to situations where the scope of the audit has been restricted, potentially impacting the auditor's ability to provide an unmodified opinion.

  • What are the conditions for an unmodified or clean opinion according to the script?

    -The conditions for an unmodified or clean opinion include the inclusion of all financial statements, obtaining sufficient and appropriate evidence, the financial statements being presented fairly in accordance with GAAP, and no circumstances requiring the addition of an emphasis of a matter or modification.

  • What are the two main issues that can prevent an auditor from giving an unmodified opinion?

    -The two main issues that can prevent an auditor from giving an unmodified opinion are 'gap' issues, where the financial statements are not prepared in accordance with GAAP, and 'gas' issues, which involve scope limitations or lack of auditor independence.

  • What is the difference between a 'gap' issue and a 'gas' issue in auditing?

    -A 'gap' issue refers to non-compliance with GAAP, which might lead to a qualified or adverse opinion depending on materiality and severity. A 'gas' issue, on the other hand, refers to scope limitations or lack of auditor independence, which might lead to a qualified opinion or a disclaimer of opinion.

  • What types of opinions can be given when there is a 'gap' issue?

    -When there is a 'gap' issue, auditors can give a qualified opinion or an adverse opinion, depending on the materiality and severity of the problem.

  • What types of opinions can be given when there is a 'gas' issue?

    -When there is a 'gas' issue, auditors might give a qualified opinion if the scope limitation is material but not severe or pervasive, or a disclaimer of opinion if the scope limitation is severe and pervasive.

  • What are some examples of scope limitations mentioned in the script?

    -Examples of scope limitations include time constraints, inability to observe inventory, inability to confirm account receivables, and not obtaining an attorney letter.

  • What is the significance of the term 'material but not severe or pervasive' in the context of scope limitations?

    -The term 'material but not severe or pervasive' indicates that the scope limitation is significant enough to affect the financial statements but does not fundamentally undermine the auditor's ability to form an opinion, which could lead to a qualified opinion rather than a disclaimer.

  • What does a disclaimer of opinion in an audit report signify?

    -A disclaimer of opinion signifies that the auditor was unable to obtain sufficient appropriate evidence to provide a basis for an audit opinion, and therefore, the auditor does not express an opinion on the financial statements.

  • What is the impact of auditor independence on the audit opinion?

    -If an auditor is not independent, as specified by the AICPA code of Professional Conduct, a disclaimer of opinion is required regardless of any other findings or scope limitations during the audit.

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Related Tags
AuditingCPA ExamGAAP ComplianceScope LimitationsAudit OpinionsFinancial StatementsAccounting EducationIndependence IssuesEvidence SufficiencyEducational Content