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The Adverse Audit Opinion Paragraph

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The Adverse Audit Opinion Paragraph essay
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Adverse audit opinion

An adverse opinion is issued after having obtained sufficient appropriate audit evidence, the auditor concludes that the misstatements, individually or when grouped with other misstatements, are both material and having pervasive effect to the financial statements.An adverse opinion will be issued when the auditor discovers that the financial statements of an auditee are materially misstated and, when considered as a whole, it do not conform to GAAP. It is considered the opposite of an unqualified, essentially stating that the information contained is materially incorrect, unreliable, and inaccurate in order to assess the auditee’s financial position and results of operations. In any case, an adverse opinion has serious consequences for the reporting entity.

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The investors, bankers, regulators and governments are rarely accept an auditee’s financial statements if the auditor issued an adverse opinion, and usually request the auditee to correct the financial statements and get another audit report. Thus, before issuing an adverse opinion, auditors will normally advise the company’s accountants and officers of such problems. In addition, auditors will then work with them to correct problems. They do this hoping to obtain another outcome as unqualified or qualified opinion, instead of adverse, if possible. In an audit report, the adverse opinion paragraph is added between scope paragraph and opinion paragraph.

In opinion paragraph the wording will changes to, “because of situations mentioned in basis for adverse opinion paragraph, in our opinion the financial statements of ABC Co. Ltd. as mentioned in first paragraph does not give a true and fair view or are not free from material misstatements.” The wording of the adverse report is similar to the qualified report. The scope paragraph is modified and an explanatory paragraph is added to explain the reason for the adverse opinion after the scope paragraph but before the opinion paragraph. Nevertheless, the most significant difference in the adverse report as compared to the qualified report is the opinion paragraph, where the auditor clearly states that the financial statements are not in accordance with GAAP, which means it is unreliable, inaccurate, and do not present a true and fair view of the auditee’s position and operations.

Disclaimer audit opinion

A disclaimer opinion is rarely used and is issued when the auditor could not form, and consequently refuses to present, an opinion on the financial statements or the auditor cannot complete the audit work due to various reasons and does not issue an opinion. Auditors may issue a disclaimer of opinion when:

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  • A lack of independence, or material conflict of interest, exist between the auditor and the auditee;
  • There are significant scope limitations, whether intentional or not, which hinder the auditor’s work in obtaining evidence and performing procedures;
  • There is a substantial doubt about the auditee’s ability to continue as a going concern.

In an audit report, an additional disclaimer opinion paragraph is added in audit report which is placed between the scope paragraph and the opinion paragraph. In scope paragraph the wording will changes from “We have audited the financial statements of ABC Co. Ltd” to “We were engaged to audit the financial statements of ABC Co. Ltd” so as to let the user know that the auditee commissioned an audit, but it does not mention that the auditor necessarily completed the audit. In addition, in the opinion paragraph the wording will change to “We do not express an opinion on the financial statements of ABC Co. Ltd. due to the situations explained in Basis for Disclaimer paragraph.” Moreover, since the audit was not completely or performed adequately, the auditor refuses to accept any responsibility by omitting the last sentence of the paragraph.

The scope paragraph is omitted in its entirety since no audit was performed. Similar to the qualified and the adverse opinions, the auditor have to briefly discuss the situations for the disclaimer in an explanatory paragraph.

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