0:00:08.000,0:00:09.033
And welcome back.
0:00:09.033,0:00:16.033
In this lesson we are going to look at how the
auditor expresses their dissatisfaction with the
financial information prepared by management.
0:00:16.033,0:00:23.000
There are two broad situations that we need to
consider, which result in four different types of
opinions, two for each situation.
0:00:23.000,0:00:26.000
The two broad situation are:
0:00:26.000,0:00:34.000
First, when we have financial statements that
are not prepared in accordance with GAAP,
which can arise when error are uncorrected,
0:00:34.000,0:00:38.066
or disagreements in the accounting treatments
of an item or there is disclosure lacking.
0:00:38.066,0:00:48.000
The second situation is when the audit has been
restricted which may be client imposed,
0:00:48.000,0:00:53.033
for example when a client prohibits us from
confirming an accounts receivable with a
customer,
0:00:53.033,0:00:59.033
or a scope a limitation that arise from
circumstances beyond anyone's control,
0:00:59.033,0:01:03.000
say a client's business burns down and with it
all the audit evidence.
0:01:03.000,0:01:09.033
So with those two broad situations in mind,
there are separate reporting outcomes for each
of them,
0:01:09.033,0:01:14.066
which simply differentiate the severity of the
situation.
0:01:14.066,0:01:17.000
When we believe that the financial statements
are still fairly presented,
0:01:17.000,0:01:22.066
but that there was in fact a material
misstatement for which we either disagree
0:01:22.066,0:01:28.033
or couldn’t gain sufficient evidence, we can
issue a qualified opinion.
0:01:28.033,0:01:35.066
The key consideration here is that the item of
contention is not pervasive to the overall fairness
of presentation.
0:01:35.066,0:01:42.033
This basically means that the item of content
can be isolated to a specific area of the financial
statements.
0:01:42.033,0:01:46.000
Let me give you a couple of examples.
0:01:46.000,0:01:53.033
So here is an example of where an auditor has
disagreed with the company over the application
of certain accounting policies.
0:01:53.033,0:02:00.066
Once again, because this item is not pervasive
to the overall fairness of presentation of the rest
of the financial statements,
0:02:00.066,0:02:07.033
then the auditor can issues an opinion only with
a separate paragraph entitled "basis for qualified
opinion",
0:02:07.033,0:02:14.033
placed just prior to the opinion paragraph
discussing the nature of the exception.
0:02:14.033,0:02:23.000
Now here is an example of where we have a
qualified opinion that arises from a scope
limitation.
0:02:23.000,0:02:29.000
So perhaps that this is the first time that a
company has been audited.
0:02:29.000,0:02:35.066
It would be awful hard for the auditors to get
evidence on the existence of opening inventory.
0:02:35.066,0:02:39.033
So the auditors make a reservation note about
this.
0:02:39.033,0:02:49.033
Once again we add a separate paragraph, prior
to the opinion paragraph, noting the basis for the
qualified opinion.
0:02:49.033,0:02:56.066
The last two opinions are fairly rare, only
because they really don’t have any value.
0:02:56.066,0:03:01.066
The fjirst type of opinion we will look at here is
called an adverse opinion.
0:03:01.066,0:03:12.000
And this when we as the auditors disagree with
management on one or more material issues
and the impact of such issues is pervassive...
0:03:12.000,0:03:16.033
on the fairness of presentation in our judgment.
0:03:16.033,0:03:23.066
This gives rise to the adverse opinion.
Once
again, we insert a paragraph prior to the opinion
paragraph that discusses the basis...
0:03:23.066,0:03:28.000
for the adverse opinion and then make reference
to it in our opinion paragraph.
0:03:28.000,0:03:34.000
And the last type of opinion we have arises
when we have a pervassive scope limitation.
0:03:34.000,0:03:43.033
Perhaps the client has restricted our ability to
observe inventories and confirm receivables.
0:03:43.033,0:03:56.033
For this reason we are unable to gather
sufficient appropriate audit evidence and in this
case we would issue a disclaimer of opinion,
0:03:56.033,0:04:03.000
which basically says, we can’t express any
opinion, so obviously that would have limited
value to our users.
0:04:03.000,0:04:10.033
Now what happens if the auditor issues and
unqualified opinion and the financial statements
are released,
0:04:10.033,0:04:13.066
but later on a material error is discovered.
0:04:13.066,0:04:19.066
We as the auditors, needs to ensure that the
users who were relying the financial statements
are informed about the misstatements.
0:04:19.066,0:04:24.000
It begins with a discussion with senior
management and the board of directors.
0:04:24.000,0:04:29.000
It may require additional audit work to be
performed.
0:04:29.000,0:04:32.033
Management will have to reissue the statements
correcting the error,
0:04:32.033,0:04:37.033
or if they refuse to do so, we will have to revise
our opinion accordingly.
0:04:37.033,0:04:43.066
So now you know how we communicate our
reservations to the users of the financial
statements.
0:04:43.066,0:04:45.000
That’s all for this lesson, so until next time,
0:04:45.000,0:04:48.033
Don’t stop until you get to the top and when you
get to the top, don’t stop.