What does qualified opinion mean on the CPA exam?
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Qualified opinion. The opinion given when a misstatement is material but not pervasive, or when evidence the auditor could not obtain would have been. The statements are fair except for that one matter.
Defined against AU-C 705.08.
Worked example
A privately held regional retailer refuses to record a $1.2 million impairment of the long-lived assets at one underperforming store, an impairment the auditor has concluded GAAP requires. Overall materiality is $400,000, total assets are $60 million, net income before the impairment is $9 million, and the audit found nothing else wrong.
What opinion does the auditor issue?
- This is a known departure from GAAP, a misstatement the auditor has measured, not a lack of evidence, so a disclaimer is off the table.
- At $1.2 million against materiality of $400,000, the misstatement is material.
- It is confined to one store's assets, about 2% of the balance sheet, and does not change the picture the statements give as a whole, so it is not pervasive.
- Material but not pervasive means the statements are fair except for this one matter: a qualified opinion, with a paragraph describing the misstatement and its effects.
Answer: A qualified opinion. Had the unrecorded impairment reached most of the company's assets and turned reported profit into a large loss, the effect would be pervasive and the opinion adverse.
The trap: Treating any material misstatement as grounds for an adverse opinion. Adverse requires the effect to be both material and pervasive; one confined, measurable departure calls for the except-for wording instead.
Based on AU-C 705.08; AU-C 705.09.
Which CPA exam sections use qualified opinion?
Qualified opinion appears in the AUD section of the CPA exam.
What is the difference between qualified opinion and adverse opinion?
Both report a misstatement the auditor could not accept. A qualified opinion says the statements are fair EXCEPT FOR one matter that is material but not pervasive. An adverse opinion says the statements are not fair at all, which is what pervasive means. Pervasiveness, not size, is the line between them. (AU-C 705)
Other terms defined against AU-C 705
- adverse opinion: The opinion given when misstatements are both material and pervasive, so the statements are not fair at all.
- disclaimer of opinion: The auditor states that no opinion is expressed, because they could not get evidence and the possible effect is pervasive.
- qualified or adverse: The two modified opinions used when the auditor has the evidence but disagrees with the statements: qualified when the effect is material, adverse when it is also pervasive.
- scope limitation: Anything that stops the auditor obtaining evidence they judged necessary, whether imposed by the client or by circumstance.
Related terms
- unqualified opinion: The clean opinion: the statements are presented fairly in all material respects.
- auditor's opinion: The conclusion the audit exists to produce.
- assessed risk: The auditor's judgment about the risk of material misstatement at the assertion level, combining inherent and control risk.
- management's specialist: An expert management uses to help prepare the financial statements, such as an actuary or an appraiser.
- written representations: Statements the auditor requires from management to confirm matters or support other evidence.
- other information: Financial and non-financial information included in the annual report outside the audited statements.