05. Qualified and Disclaimer Opinions under GAAS

By Jay

Qualified and Disclaimer Opinions under GAAS

1. Overview

Under Generally Accepted Auditing Standards (GAAS), an auditor may issue:

  • A Qualified Opinion
  • A Disclaimer of Opinion

depending on the nature and pervasiveness of:

  • Misstatements (GAAP issues)
  • Scope limitations (GAAS issues)

2. Qualified Opinion

A Qualified Opinion is issued when:

  • Material but not pervasive misstatement exists (GAAP issue), or
  • Material but not pervasive scope limitation exists (GAAS issue).

Examples:

  • GAAP departure: Inventory is overstated but the error is confined to a specific account.
  • GAAS limitation: The auditor was unable to observe inventory counts for a portion of inventory but obtained sufficient alternative procedures for other areas.

In a qualified opinion, the auditor uses the phrase:
"except for" the effects of the matter, the financial statements are presented fairly.

3. Disclaimer of Opinion

A Disclaimer of Opinion is issued when:

  • Pervasive scope limitation prevents the auditor from obtaining sufficient appropriate audit evidence (GAAS issue),
  • or, the auditor lacks independence (automatic disclaimer).

Examples:

  • The client refuses to allow access to significant records and no alternative procedures are possible.
  • The auditor is not independent (e.g., has a financial interest in the client).

In a disclaimer, the auditor states:

  • Disclaimer in the title.
  • "We were engaged to audit ~" not "We have audited."
  • "We do not express an opinion" on the financial statements.

CAM should be omitted.

4. GAAP vs GAAS — Causes for Different Opinions

BasisQualified OpinionDisclaimer of Opinion
GAAP (Misstatements)Misstatement is material but not pervasive❌ (Does not lead to disclaimer under GAAP)
GAAS (Scope limitations)Scope limitation is material but not pervasiveScope limitation is pervasive (major parts unaudited) or independence issue

5. Key Decision Framework (Summary)

  1. Material misstatement (GAAP problem)?

    • Not pervasive → Qualified Opinion
    • Pervasive → Adverse Opinion (NOT disclaimer)

  2. Scope limitation (GAAS problem)?

    • Not pervasive → Qualified Opinion
    • Pervasive → Disclaimer of Opinion

  3. Independence issue?

    • Always → Disclaimer of Opinion
6. Important Phrases to Remember
  • Qualified Opinion: "Except for..."
  • Disclaimer of Opinion: "We do not express an opinion."