Adverse Opinion

Publication Date :

Blog Author :

Edited by :

Reviewed by :

Table Of Contents

arrow

What is Adverse Opinion?

Adverse Opinion provided by the statutory auditor in his audit report denotes that the company's financial statements do not show a 'True & Fair' view of the organization's business practices and have been misrepresented or misstated.

Table of contents

Explanation

The statutory auditor is responsible for giving his view on the truthiness & fairness of the financial statements prepared by the management at the end of the fiscal year, which shows the organization's business practices. While performing his audit procedures, the auditor tries to obtain sufficient and appropriate audit evidence to verify the data provided in the entity's financial statement. After collecting the audit evidence, the auditor forms his opinion on the fairness of the financial statement provided by the entity.

Adverse-Opinion

Example of Adverse Opinion

In the financial year 2018-19, a company faced an extraordinary event (earthquake), which destroyed a lot of business activity. The financial statement and notes to the company's financial statements do not disclose the said fact. These circumstances indicate material uncertainty on the company’s ability to continue as a going concern. Therefore it may not be able to realize its assets or pay off the liabilities during the regular course of its business. Auditors are required to draft their opinion and explain.

Solution:

In this case, not disclosing the fact of 'destruction of business due to earthquake' clearly states that the financial statement does not provide an accurate & fair view of the organization. So the auditor needs to give an Adverse Opinion in his audit report for the fiscal year 2018-19.

And such would be shown as below:

In our opinion, because of the omission of the information provided above in the financial statement, the financial statement does not give an accurate & fair view as per the requirements. Also, it does not provide the information need to be reported as per the accounting principle:

  1. In the case of the balance sheet, the state of affairs of the company as of the 31st March 2019
  2. In the case of the profit & loss statement, the profit/loss for the year ended on the 31st March 2019
  3. In the case of the cash flow statement, the cash flow of the company for the year ended on 31st March 2019

If you want to learn more about Auditing, you may also consider taking courses offered by Coursera –

  1. Auditing I: Conceptual Foundations of Auditing
  2. Auditing II: The Practice of Auditing

Why is Adverse Opinion Important?

  • Let’s consider a statutory auditor obtaining evidence required for an audit, and during the audit, he came to know that there were some misstatements. He asks management to rectify the inaccuracies. If management rectifies those misstatements, then he gives an unqualified opinion. Still, if the former doesn’t make corrections, and it is so significant that he can’t provide a qualified opinion, he gives an adverse opinion.
  • If he identifies some fraud in the organization and management of the organization is also involved in the scam, the auditor asked management to disclose that in financial statements. If management refuses to disclose the same, and if it is so significant that he can’t just qualify the report, he should give an adverse opinion.
  • It is essential for stakeholders of the company, like for shareholders, as shareholders are the owner of the company, and they need to know the company's financial situation because they have invested their money in that organization. Banks need to know the actual condition of the organization and whether a company is in a condition to repay the loan and interest amount.
  • The government needs to know that the company follows all the rules and regulations and pays statutory dues on time. All stakeholders have some interest in an organization, so if an auditor decides that a financial statement is not giving true and fair views or financial statements are not prepared according to respective laws and regulations, he should give an adverse opinion.

Difference Between Adverse and Disclaimer

  •  Adverse Opinion - As explained, during the audit, if the auditor gets information and documents that show there is some material misstatement or fraud and management is not ready to rectify the information or disclose that in the financial statement, internal control of the company is not good or management try to restrict the scope of the audit. They are not ready to lift the restriction. In that case, the auditor should communicate this to upper-level management. If upper-level management is also not lifting the restriction, in that case, he should communicate to those charged with governance and give an adverse opinion. When he gives an adverse opinion in his audit report, he writes that he has obtained sufficient and appropriate evidence. Based on that, in his opinion, financial statements are not giving an accurate and fair view, or financial statements are not prepared according to respective law.
  • Disclaimer - During the audit, if an auditor is not getting information from management or if management restricts him from obtaining evidence from outside parties, he is not getting sufficient evidence from any source. If there is some material misstatement and he doesn’t have adequate and appropriate evidence, and that misstatement is significant that he can't just qualify the opinion in that case. He gives a disclaimer of opinion. In his audit report, he writes that he wasn’t able to obtain sufficient and appropriate evidence, so he is not able to give his opinion on financial statements.

Conclusion

When financial statements don’t provide all the information and statutory auditor after conducting an audit & based on all the evidence collected, he concludes that the financial statement is not providing a true and fair view. He will discuss all this with management and those charged with governance. After communication, he gives an adverse opinion.