04. Qualified Opinion and Adverse Opinion

By Jay

Qualified Opinion and Adverse Opinion under PCAOB Standards

📚 Overview

In an audit conducted under PCAOB (Public Company Accounting Oversight Board) standards, the auditor expresses:

  • A Qualified Opinion when financial statements are materially misstated or when the auditor cannot obtain sufficient appropriate audit evidence, but the effects are not pervasive.
  • An Adverse Opinion when financial statements are materially and pervasively misstated.

📘 Qualified Opinion

Definition:

A qualified opinion is issued when:

  • There is a material misstatement of the financial statements, but it is not pervasive; OR
  • There is a limitation on the scope of the audit that is material, but not pervasive.

PCAOB Reporting Requirements:

  • Modify the Opinion section to state that the financial statements are presented fairly except for the effects of the matter.
  • Basis for Qualified Opinion paragraph is inserted immediately before the Opinion paragraph.
  • Explain the reasons for the qualification clearly and directly.

Typical Wording Example:

"In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements present fairly, in all material respects, the financial position..."

📕 Adverse Opinion

Definition:

An adverse opinion is issued when:

  • There is a material and pervasive misstatement of the financial statements.
  • The financial statements do not present fairly the financial position, results of operations, or cash flows.

PCAOB Reporting Requirements:

  • Modify the Opinion section to explicitly state that the financial statements do not present fairly.
  • Basis for Adverse Opinion paragraph is placed before the Opinion paragraph.
  • Clearly describe the misstatements and their pervasive impact.

Typical Wording Example:

"Because of the significance of the matter described in the Basis for Adverse Opinion paragraph, the financial statements do not present fairly, in all material respects, the financial position..."

🛑 Key Points to Remember for USCPA Exam

  • Material but not pervasive → Qualified Opinion
  • Material and pervasive → Adverse Opinion
  • Always include a Basis for Opinion section before the modified opinion paragraph.
  • Under PCAOB standards, the format and structure are very rigid (standardized form highly tested).
  • In both cases, the auditor’s responsibility section and management’s responsibility section are still included.

📝 Quick Practice Tip

  • "Except for" = Qualified
  • "Do not present fairly" = Adverse
  • "Pervasive"