What does qualified or adverse mean on the CPA exam?
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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.
Defined against AU-C 705.07.
Worked example
Two privately held clients, each with overall materiality of $300,000, refuse to correct a misstatement the auditor has fully measured. Client A, with pretax income of $7 million, overstates finished goods inventory by $900,000 out of total assets of $50 million. Client B has not consolidated a subsidiary it controls, and that subsidiary holds most of the group's assets, revenue and debt.
Which opinion does each client receive?
- Both are misstatements the auditor has evidence for, so both modified opinions in play are qualified or adverse; a disclaimer belongs to missing evidence.
- Client A: $900,000 against $300,000 is material, but it sits in one inventory line and leaves the rest of the statements usable, so it is not pervasive. Qualified.
- Client B: leaving out most of the group's assets, revenue and debt distorts nearly every figure a reader would use, so the effect is material and pervasive. Adverse.
Answer: Client A receives a qualified opinion and Client B an adverse opinion, each with a basis paragraph describing the misstatement.
The trap: Deciding between the two by the size of the error alone. Both errors are material; what separates them is reach. One line item, however large, can still be qualified, while an omission that runs through the whole picture is adverse.
Based on AU-C 705.08; AU-C 705.09.
Which CPA exam sections use qualified or adverse?
Qualified or adverse appears in the AUD section of the CPA exam.
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 opinion: The opinion given when a misstatement is material but not pervasive, or when evidence the auditor could not obtain would have been.
- scope limitation: Anything that stops the auditor obtaining evidence they judged necessary, whether imposed by the client or by circumstance.
Related terms
- 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.