Knowledge Check 01 Match the term and the definition. 1. Unqualified with emphasis paragraph 2. Adverse 3. The auditor believes the financial statements are in conformity with GAAP but there is a going concern situation. The auditor has specific knowledge that financial statements or disclosures are seriously misstated or misleading The auditor is not able to gather sufficient information that financial statements are in conformity with GAAP. The auditor believes the financial statements are in conformity with GAAP but wishes to draw attention to events subsequent to the balance sheet date. There has been a departure from GAAP, but it not of sufficient seriousness to invalidate the financial statements as a whole. Disclaimer 4. Unqualified with emphasis paragraph 5. Qualified
The correct answer and explanation is:
Knowledge Check 01 – Matching Terms and Definitions
- Unqualified with Emphasis Paragraph → The auditor believes the financial statements are in conformity with GAAP but there is a going concern situation.
- Adverse → The auditor has specific knowledge that financial statements or disclosures are seriously misstated or misleading.
- Disclaimer → The auditor is not able to gather sufficient information that financial statements are in conformity with GAAP.
- Unqualified with Emphasis Paragraph → The auditor believes the financial statements are in conformity with GAAP but wishes to draw attention to events subsequent to the balance sheet date.
- Qualified → There has been a departure from GAAP, but it is not of sufficient seriousness to invalidate the financial statements as a whole.
Explanation
Auditors provide opinions on financial statements to ensure accuracy and reliability for stakeholders. The five types of audit opinions are unqualified with emphasis paragraph, adverse, disclaimer, and qualified, each reflecting different levels of financial statement credibility.
An unqualified opinion means the financial statements comply with Generally Accepted Accounting Principles (GAAP). However, an unqualified opinion with an emphasis paragraph highlights concerns like going concern issues or significant events occurring after the balance sheet date.
An adverse opinion is the most serious, issued when financial statements are materially misstated or misleading. This indicates major compliance issues with GAAP, reducing credibility.
A disclaimer of opinion occurs when an auditor cannot obtain enough information to form an opinion on financial statement accuracy. This happens due to limited access to records or significant uncertainties, preventing a definitive conclusion.
A qualified opinion suggests financial statements are mostly in line with GAAP but contain minor deviations. These issues do not render the financial statements completely unreliable but require disclosure.
Each audit opinion influences stakeholders’ trust, affecting investments and business decisions. Adverse or disclaimer opinions can raise red flags for regulators, investors, and creditors, while an unqualified opinion signals reliability. Understanding these reports is crucial for financial transparency and decision-making.
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