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.
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., 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..
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.
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.:
- 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., the state of affairs of the company as on the 31st March 2019
- In the case of profit & loss statement, the profit/loss for the year ended on the 31st March 2019
- 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., 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 –
Why is Adverse Opinion Important?
- Let’s consider a statutory auditor obtains evidence require for audit, and during the audit, he came to know that there are some misstatements. He asks management to rectify the inaccuracies. If management rectifies those misstatements, then he gives an unqualified opinion. Still, in case 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., then he gives an adverse opinion.
- If he identifies some fraud in the organization and management of the organization is also involved in the scam, and 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 financial situation of the company because they have invested their money in that organization. For Banks, they need to know the actual condition of the organization, whether a company is in a condition to repay the loan and interest amount.
- The government needs to know that the company is following all the rules and regulations and paying statutory dues on time. As 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 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. 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. 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., when he gives an adverse opinion, 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 to obtain evidence from outside parties and 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.
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.
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 –