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 financial year which is showing the business practices of the organization. The auditor upon performing his audit procedures try 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 entity.
Example of Adverse Opinion
In the financial year 2018-19, the company has faced an extraordinary event (earthquake) where a lot of business activity of the company has been destroyed due to the earthquake. These circumstances indicate material uncertainty on the company’s ability to continue as going concern and therefore it may not be able to realize its assets or pay off the liabilities during the normal 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 a true & fair view of the organization. So the auditor needs to provide an Adverse Opinion in his audit report for the financial 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 provide the true & fair view as per the requirements and also does not provide the information need to be reported as per the accounting principle:
- In the case of the balance sheet, 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 statement, the cash flow of the company for the year ended on 31st March 2019
Why is Adverse Opinion Important?
- When statutory auditor obtains evidence require for audit and during the audit he came to know that there are some misstatements & he asked management to rectify the misstatements, if management rectifies those misstatements then he gives unqualified opinion but in case of management don’t rectify the same and it is so significant that he can’t give qualified opinion then he give an adverse opinion.
- If he identifies some fraud in organization and management of the organization is also involved in the fraud and auditor asked management to disclose that in financial statements, and 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 important 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 comes to the decision that financial statement is not giving true and fair view or financial statements are not prepared according to respective law and regulations, he should give an adverse opinion.
Difference Between Adverse and Disclaimer
- Adverse Opinion – As explained, during the audit if auditor get 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 and they are not ready to lift the restriction in that case auditor should communicate this to upper-level management and 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 report when he gives adverse opinion he writes that he has obtained sufficient and appropriate evidence and on the basis of that in his opinion financial statements are not giving true 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 if management restricts him to get 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 sufficient and appropriate evidence and that misstatement is significant that he can’t just qualify the opinion in that cases he gives 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 & on the basis of all the evidence collected, he comes to the conclusion that financial statement is not providing a true and fair view, he will discuss all this with management and those charged with governance and 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 important along with an example, differences between adverse and disclaimer. You can learn more about from the following articles –