Adverse Opinion

What is Adverse Opinion?

Adverse Opinion provided by the statutory auditor in his audit report denotes that financial statements of the company does not show ‘True & Fair’ view of the business practices of the organization and has been misrepresented or mistated.

 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 is showing the business practices of the organization. The auditorAuditorAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws.read more, while performing his audit procedures, tries to obtain sufficient and appropriate audit evidence to verify the data provided in the financial statement of the entity. After collecting the audit evidence, the auditor forms his opinion on the fairness of the financial statement provided by the entityFinancial Statement Provided By The EntityFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more.

Adverse-Opinion

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For eg:
Source: Adverse Opinion (wallstreetmojo.com)

Example of Adverse Opinion

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

Solution:

In this case, not disclosing the fact of ‘destruction of business due to earthquake’ clearly state that the financial statement is not providing 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:

  1. 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 on the 31st March 2019
  2. In the case of profit & loss statement, the profit/loss for the year ended on the 31st March 2019
  3. In the case of cash flow statementCash Flow StatementStatement of Cash flow is a statement in financial accounting which reports the details about the cash generated and the cash outflow of the company during a particular accounting period under consideration from the different activities i.e., operating activities, investing activities and financing activities.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

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

Why is Adverse Opinion Important?

Difference Between Adverse and Disclaimer

Conclusion

When financial statements don’t provide all the information and statutory auditor after conducting audit & based on all the evidence collected, he concludes that 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.

Recommended Articles

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 from the following articles –

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