An audit opinion is a written statement of an independent auditor upon his completion of an independent, unbiased and professional evaluation of the financial statements presented by the company.
There are two types of audit opinion that an auditor can issue: an unqualified opinion and a modified opinion.
Unqualified Opinion
An unqualified opinion is issued when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.
Modified Opinion
A modified opinion is issued when: based on the audit evidence obtained, the auditor concludes that the financial statements are not free from material misstatement; or if the auditor is unable to obtain enough appropriate audit evidence to conclude that the financial statements are free from material misstatement.
There are three types of modified opinion. These are:
- Qualified Opinion
- When to issue a qualified opinion?
A qualified opinion is issued when the auditor is:
- Able to obtain sufficient appropriate audit evidence and has concluded that misstatements (individually or in aggregate) are material but not pervasive to the financial statements.
- Unable to obtain sufficient appropriate audit evidence but has concluded that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.
- Examples of situations that may result to expressing a qualified opinion:
- The company’s inventory is not accounted correctly (Deviation from GAAP)
- Its cash account has incomplete records (Scope Limitation)
- Adverse Opinion
- When to issue an adverse opinion?
An adverse opinion is issued when the auditor is:
- Able to obtain sufficient appropriate audit evidence and has concluded that misstatements (individually or in aggregate) are both material and pervasive to the financial statements.
- Examples of situations that may result to expressing an adverse opinion:
- Accounting records of the company were destroyed by the previous management.
- The balances of trade and other payables is lacking supporting documentary evidences.
- The relevant tax returns of the company for the year 2010-2015 have not been prepared, therefore, no tax returns have been submitted in those years.
- Disclaimer of Opinion
- When to issue a disclaimer of opinion?
A disclaimer of opinion is issued when:
- The auditor is unable to obtain sufficient appropriate evidence on which to base the opinion, and concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.
- It is not possible for the auditor to form an opinion on the financial statements due to the potential interaction of the uncertainties and their possible cumulative effect on the financial statements.
- Examples of situations that may result to expressing a disclaimer of opinion:
- Reports violate accounting principles.
- Auditors aren’t allowed to access certain relevant financial data on majority of the transactions selected for audit.
- Lack of independence
Sources: https://www.saonm.org/media/uploads/OSA_Audit_Overview_Jan_19_2016.pdf
https://pcaobus.org/Standards/Auditing/Pages/Auditing_Standard_14.aspx
https://www.aasc.org.ph/new_std_sept2016/PSA%20700%20(Revised)%20- %20clean.pdf
