What is Adverse Opinion?

 Explanation

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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 principleAccounting PrincipleAccounting principles are the set guidelines and rules issued by accounting standards like GAAP and IFRS for the companies to follow while recording and presenting the financial information in the books of accounts.read more:

  • In the case of the balance sheetThe Case Of The Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more, the state of affairs of the company as of the 31st March 2019In the case of the profit & loss statement, the profit/loss for the year ended on the 31st March 2019In the case of the cash flow statementCash Flow StatementA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business.read more, 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 –

  • Auditing I: Conceptual Foundations of AuditingAuditing 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 opinionQualified OpinionThe company’s auditor issues a qualified opinion in the audit report if it is found that the company’s financial statements are presented fairly, but with exceptions in specific areas. It is one level below a Unqualified Opinion (i.e. Clean Opinion) and is given when the Auditor believes the financial statement has not been prepared in accordance with the rules laid down under the provisions of GAAP or IFRS.read more, 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 in accounting refers to the process by which a company implements various rules, policies, or procedures to ensure the accuracy of accounting and finance information, safeguard the various assets of the business, promote accountability in the business, and prevent the occurrence of frauds in the company.read more internal controlInternal ControlInternal control in accounting refers to the process by which a company implements various rules, policies, or procedures to ensure the accuracy of accounting and finance information, safeguard the various assets of the business, promote accountability in the business, and prevent the occurrence of frauds in the company.read more 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 reportAudit ReportAn audit report is a document prepared by an external auditor at the end of the auditing process that consolidates all of his findings and observations about a company’s financial statements.read more, 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.

This has been a guide to What is Adverse Opinion and its Definition. Here we discuss types of opinion and why it is vital, along with an example, differences between adverse and disclaimer. You can learn more about it from the following articles –

  • Unqualified OpinionWhat is Qualified Opinion?Audit MaterialityExternal Audit