Qualified opinion definition
/What is a Qualified Opinion?
A qualified opinion is a written statement by a certified public accountant in an audit report, stating that the financial statements of a client are fairly presented, except for a specified issue. The issue typically relates to a limitation on the scope of the audit, so that the auditor was unable to obtain sufficient evidence to verify various aspects of the transactions and reports being audited. Qualified opinions may also be issued if there is a lack of conformity with GAAP, inadequate disclosure, uncertainties in estimates, or the statement of cash flows has been omitted.
The qualified opinion is listed in the third position in the audit report, after a statement of management’s responsibilities for preparing the financial statements and maintaining a system of internal controls, and a description of the auditor’s responsibilities.
In essence, an organization that is being audited tries to avoid a qualified opinion, since it casts doubt on the financial statements of the entity.
Situations that Can Trigger a Qualified Opinion
The primary situations that can trigger a qualified opinion are as follows:
Material misstatements that are not pervasive. If the auditor identifies a material misstatement in the financial statements that affects certain areas but does not undermine the overall reliability of the financial statements, a qualified opinion is issued. The auditor notes that except for the specific issue, the financial statements are fairly presented. This allows users to understand that while most information is reliable, there is a notable but isolated error. It highlights an important but limited concern for stakeholders.
A scope limitation. When the auditor is unable to obtain sufficient audit evidence on certain transactions or account balances, and the issue is material but not pervasive, a qualified opinion may result. Scope limitations can occur if management restricts access to records or if documentation is missing. In these cases, the auditor states that the financial statements are fairly presented except for the areas where evidence could not be obtained. It informs users that there is incomplete verification of some parts of the report.
Inadequate disclosures. If a company fails to include necessary disclosures required by the applicable financial reporting framework, and this omission is material but not pervasive, the auditor issues a qualified opinion. Proper disclosures are essential for a complete understanding of financial health and risks. The auditor highlights that while most of the financial statements are accurate, important explanatory information is missing. This helps users be aware that they do not have a full picture.
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Example of a Qualified Opinion
Here is an example of the basis for a qualified opinion, which auditors might insert into their audit report:
The Company has stated inventories at cost in the accompanying balance sheets. Accounting principles generally accepted in the Unites States of America require inventories to be stated at the lower of cost or market. If the Company stated inventories at the lower of cost or market, a write down of $810,000 would have been required as of December 31, 20X1. Accordingly, the cost of sales would have been increased by $810,000, and net income, income taxes, and stockholders’ equity would have been reduced by $810,000, $170,000, and $640,000 as of and for the year ended December 31, 20X1.