What Is a Qualified Opinion?A qualified opinion is a statement issued in an auditor's report that accompanies a company's audited financial statements. It is an auditor's opinion that suggests the financial information provided by a company was limited in scope or there was a material issue with regard to the application of generally accepted accounting principles (GAAP)—but one that is not pervasive. Show
Qualified opinions may also be issued if a company has inadequate disclosures in the footnotes to the financial statements. Key Takeaways
Understanding a Qualified OpinionA qualified opinion may be given when a company’s financial records have not followed GAAP in all financial transactions, but only if the deviation from GAAP is not pervasive. The term "pervasive" can be interpreted differently based on an auditor's professional judgment. However, to not be pervasive, the misstatement must not misrepresent the factual financial position of the company as a whole and should not have an effect on the decision-making of financial statement users. A qualified opinion may also be given due to a limitation of scope in which the auditor was not able to gather sufficient evidence to support various aspects of the financial statements. Without sufficient verification of transactions, an unqualified opinion may not be given. Inadequate disclosures in the notes to the financial statements, estimation uncertainty, or the lack of a statement of cash flows are also grounds for a qualified opinion. How a Qualified Opinion Is RepresentedA qualified opinion is listed in the third and final section of an auditor’s report. The first section of the report outlines management’s responsibilities in regards to preparing the financial statements and maintaining internal controls. The second section outlines the auditor’s responsibilities. In the third section, an opinion is given by the independent auditor regarding the company’s internal controls and accounting records. The opinion may be unqualified, qualified, adverse, or a disclaimer of opinion. A qualified opinion states that the financial statements of a corporate client are, with the exception of a specified area, fairly presented. Auditors typically qualify the auditor's report with a statement such as "except for the following," when they have insufficient information to verify certain aspects of the transactions and reports being audited. A qualified opinion is not so severe that it indicates that a business is doing poorly or that a company has hidden or falsified information, but rather, that the auditor simply cannot give an issue free report. The auditor may specify that they believe the overall audit to be true and factual but will specify the area that they believe is the issue. Qualified Opinion vs. Other OpinionsA qualified opinion is a reflection of the auditor’s inability to give an unqualified, or clean, audit opinion. An unqualified opinion is issued if the financial statements are presumed to be free from material misstatements. It is the most common type of auditor's opinion. If the issues discovered during the audit result in material misstatements that would affect the decision making of the financial statement users, the opinion is escalated to an adverse opinion. The adverse opinion results in the company needing to restate and complete another audit of its financial statements. A qualified opinion is still acceptable to most lenders, creditors, and investors. In the event that the auditor is unable to complete the audit report due to the absence of financial records or insufficient cooperation from management, the auditor issues a disclaimer of opinion. This is an indication that no opinion over the financial statements was able to be determined.
The auditor is unable to obtain sufficient appropriate evidence to support management’s assertions concerning an uncertainty.Based on the audit evidence that is, or should be, available, the auditor assesses whether the audit evidence is sufficient to support managements’ assertions about an uncertainty. When the auditor cannot obtain sufficient appropriate evidence, (s)he expresses a qualified opinion if the possible effects are material but not pervasive. If the possible effects are material and pervasive, (s)he disclaims an opinion.An auditor released an audit report that was dual-dated for a subsequently discovered fact occurring after the date of the auditor’s report but before issuance of the related financial statements. The auditor’s responsibility for events occurring subsequent to the original report date wasLimited to the specific event referenced.Subsequent to the original report date, the auditor is responsible only for the specific subsequently discovered fact for which the report was dual-dated. (S)he is responsible for other events only up to the original report date.Which of the following is the responsibility of the auditor when performing an audit?Obtaining reasonable assurance regarding fair presentation.An audit of the financial statements of a nonissuer is conducted in accordance with GAAS. They require that the auditor “plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.” An unmodified opinion states that they are presented fairly in all material respects.If financial statements are to meet the requirements of adequate disclosure,All information believed by the auditor to be essential to the fair presentation of the financial statements must be disclosed, no matter how confidential management believes the data to be.In considering the adequacy of disclosure, the auditor necessarily uses confidential client information. Otherwise, forming an opinion on the statements would be difficult. To the extent required by GAAP or an other appropriate financial reporting framework, such information must be disclosed. But beyond these requirements, the auditor who discloses confidential information without specific consent violates the Code of Professional Conduct.In an audit of a nonissuer, the auditor’s report most likely is addressed to the following:Board of directors:Audited entity:Internal auditors:YesYesNoAccording to AU-C 700, the auditor’s report ordinarily is addressed to those for whom the report is prepared. It may be addressed to the entity whose statements are being audited or to those charged with governance (e.g., the board or the audit committee). If the client is an unincorporated entity, the addressee depends on the circumstances, e.g., to the partners or the proprietor.In the first audit of a client, an auditor was not able to gather sufficient appropriate audit evidence about the consistent application of accounting principles between the current and the prior year, as well as the amounts of assets or liabilities at the beginning of the current year. This was due to the client’s record retention policies. If the amounts in question could materially affect current operating results, the auditor most likely wouldBe unable to express an opinion on the current year’s results of operations and cash flows.According to AU-C 705, in a first audit, the auditor is permitted to (1) express an unmodified opinion on the financial position of the entity and (2) disclaim an opinion on the results of operations and cash flows, if relevant. A disclaimer of opinion is expressed because the auditor is unable to obtain sufficient appropriate audit evidence. This inability may result from (1) circumstances not controlled by the entity, (2) circumstances related to the nature or timing of the auditor’s work, or (3) limitations imposed by management.An auditor who expresses an opinion that the financial statements of a nonissuer are presented fairly has determined thatAudit risk is acceptably low.Presented fairly means the financial statements as a whole are free from material misstatement, whether due to fraud or error. The auditor should conclude whether (s)he has obtained reasonable assurance regarding fair presentation. Reasonable assurance is a high but not absolute standard. It is achieved when the auditor obtains sufficient appropriate evidence that audit risk is acceptably low. Audit risk is the risk of expressing an inappropriate opinion when the statements are materially misstated.Without affecting the CPA’s willingness to express an unmodified opinion on the client’s U.S.-GAAP-based financial statements, corporate management may refuse a request toChange its basis of accounting for inventories from FIFO to LIFO because, in the opinion of the CPA, the FIFO method fails to give adequate recognition to the extraordinary increases in prices of merchandise acquired and held by the company.FIFO (first-in, first-out) and LIFO (last-in, first-out) are both methods of accounting for inventories that are generally accepted in the U.S. LIFO has the advantage during periods of inflation of matching current costs with current revenues. An independent auditor who has requested a change from FIFO to LIFO is likely to express an unmodified opinion even if management refuses to do so because the financial statements would still conform with U.S. GAAP.In which of the following circumstances would an auditor usually choose between expressing a qualified opinion or disclaiming an opinion?Inability to obtain sufficient appropriate audit evidence.Scope limitations may require a qualification of the opinion or a disclaimer. The choice depends on whether the possible effects of undetected misstatements are material and pervasive.When an independent CPA is associated with the financial statements of an issuer but has not audited or reviewed such statements, the appropriate form of report to be issued must include a(n)Disclaimer of opinion.PCAOB auditing standards apply to engagements involving issuers. Under these standards, when an accountant is associated with the financial statements of an issuer but has not audited or reviewed such statements, the report should disclaim an opinion on them (PCAOB AS 3320).When an independent CPA is associated with the financial statements of an issuer but has not audited or reviewed such statements, the appropriate form of report to be issued must include a(n)Disclaimer of opinion.PCAOB auditing standards apply to engagements involving issuers. Under these standards, a disclaimer should be attached to the financial statements of an issuer when an accountant is associated with those statements and has not audited or reviewed them. Association means that the accountant has consented to the use of his or her name in a report, document, or written communication containing the statements. Association also means that the accountant has prepared or assisted in preparing statements that (s)he submits to a client or others even if his or her name is not used (PCAOB AS 3320). (adsbygoogle = window.adsbygoogle || []).push({});A major purpose of the auditor’s report on financial statements is toClarify for the public the nature of the auditor’s responsibility and performance.One of the highest priorities of the AICPA has been to reduce the gap between the nature of the auditor’s responsibility and performance and the public’s perception of the audit function. The auditor’s report issued in accordance with auditing standards clarifies the role of the auditor with the intention of diminishing the gap.When qualifying an opinion because of an insufficiency of appropriate audit evidence, an auditor of a nonissuer client should refer to the situation in theAuditor's responsibility section:Notes to the financial statements:YesNoAn auditor may express a qualified opinion due to an inability to obtain sufficient appropriate audit evidence if the possible effects are material but not pervasive. But the notes to the financial statements are unchanged because they were not drafted by the auditor. Moreover, a sentence in the auditor’s responsibility section states, “We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.”When single-year financial statements are presented, an auditor ordinarily expresses an unmodified opinion if thePrior year’s financial statements were audited by another CPA whose report, which expressed an unmodified opinion, is not presented.When single-year financial statements are presented, the auditor’s reporting responsibility is limited to those statements. If the prior year’s financial statements are not presented for comparative purposes, the current-year auditor should not refer to the prior year’s statements and the report thereon. Furthermore, the failure to present comparative statements is not a basis for modifying the opinion.When an auditor qualifies an opinion on the financial statements of a nonissuer because of a scope limitation, which part(s) of the auditor’s report should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself?The opinion paragraph only.When a qualified opinion results from an inability to obtain sufficient appropriate evidence in an audit of a nonissuer, the auditor describes the matter in the basis for qualified opinion paragraph, not in a note to the statement. The description of the audit scope is the responsibility of the auditor, not management. The opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements, not to the scope limitation itself. The wording “. . . except for the possible effects of the matter described in the basis for qualified opinion paragraph . . .“ is appropriate. The following are the other effects on the auditor’s report when the opinion is qualified due to an inability to obtain sufficient appropriate evidence with possible effects that are material but not pervasive: (1) The introductory paragraph is unchanged; (2) the management’s responsibility paragraph is unchanged; and (3) the auditor’s responsibility section ends with the sentence, “We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.”Which of the following statements is a basic element of the auditor’s report for a nonissuer?The procedures used depend on the auditor’s judgment.The auditor’s responsibility section states, “The procedures selected depend on the auditor’s judgment . . .” (adsbygoogle = window.adsbygoogle || []).push({});An auditor’s opinion reads as follows: “In our opinion, except for the above-mentioned limitation on the scope of our audit...” This is an example of anunacceptable reporting practice.When an opinion is qualified because of a scope limitation, the opinion paragraph should indicate that the qualification pertains to the possible effects on the statements of undetected misstatements (AU-C 705 and AS 3105). The language given in the question bases the qualification on the restriction itself and is unacceptable.When an independent CPA assists in preparing the financial statements of an issuer but has not audited or reviewed them, the CPA should issue a disclaimer of opinion. In such situations, the CPA has no responsibility to apply any procedures beyondReading the financial statements for obvious material misstatements.PCAOB standards apply to audit engagements involving issuers. Under the standards, the accountant has no responsibility to apply any procedures beyond reading the financial statements for obvious material misstatements. Any procedures applied should not be described.Under which of the following circumstances may audited financial statements contain a note that is labeled “unaudited,” disclosing an event occurring after the balance sheet date?When the event occurs after the date of the auditor’s original report.To prevent the financial statements from being misleading, management may disclose an event that arose after the date of the auditor’s report. If the event is included in a separate note labeled as unaudited [e.g., a note captioned as “Event (Unaudited) Subsequent to the Date of the Independent Auditor’s Report”], the auditor need not perform any procedures on the note. Moreover, the auditor’s report should have the same date as the original report (AU-C 560).An auditor may reasonably express an “except for” qualified opinion for a(n)Scope limitation:Unjustified change in an accounting principle:YesYesA qualified opinion should be expressed if the auditor (1) has obtained sufficient appropriate audit evidence and concludes that misstatements, individually or combined, are material but not pervasive to the financial statements or (2) is unable to obtain sufficient appropriate audit evidence but concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive. A misstatement results from, for example, an inappropriate selection or application of an accounting principle. Among other things, the auditor evaluates whether the entity has justified that the alternative principle is preferable. An inability to obtain sufficient appropriate evidence is a scope limitation. Thus, an unjustified change in principle or a scope limitation may require expression of a qualified opinion. NOTE: All qualified opinions are “except for” opinions.In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion and an adverse opinion?In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion and expressing an adverse opinion? The financial statements fail to disclose information that is required by generally accepted accounting principles.
In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion or an adverse opinion quizlet?If the auditor concludes that management's estimate is unreasonable and that its effect is to cause the financial statements to be materially misstated, the auditor should express a qualified or an adverse opinion.
Under what circumstances would an auditor issue a qualified opinion?A qualified opinion may be given when a company's financial records have not followed GAAP in all financial transactions, but only if the deviation from GAAP is not pervasive. The term "pervasive" can be interpreted differently based on an auditor's professional judgment.
In which of the following circumstances would auditors be most likely to express an adverse opinion?In which of the following circumstances would auditors be most likely to express an adverse opinion? The financial statements are not in accordance with generally accepted accounting principles regarding the capitalization of leases.
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In which of the following circumstances would an auditor usually choose between expressing a qualified opinion?
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