Different between Unqualified and Qualified Opinion

Before we explain the difference between qualified audit opinion and unqualified audit opinion, we should start with the meaning of audit opinion, why do auditor express the opinion and how seriousness of each opinion.

The Audit opinion is basically the statement that issued or express by independent auditors based on result found as the result of applying many audit methodology and procedures. Those including understanding and assess internal control over financial reporting.

Review management’s integrity is also part of the procedure to collect evidence. And the most important thing is the result from performing the substantive test or we can call detail testing.

There are many different of opinions ranging from expressing that the financial statements are true and fair view to disclaiming that they even can’t express their opinion as to the result of can’t obtain information.

There are two big auditor opinions that mention by ISA 700 and ISA 705. They are qualified and unqualified.

For unqualified opinion, the audit report is dealing ISA 700 and it is for financial statements that have no material misstatements.

That means the financial statements are free from material misstatements. It is a clean audit report.

For a qualified opinion, it is a sub of the modified audit opinion, where auditor issued this opinion for the financial statements that do not present true and fair view in all material respect.

That means at least accounts balance in the balance sheet or accounting transactions in the income statement are materiality misstated.

But, the misstated accounts balance or transactions are affected only themselves. They are not affected to the whole to financial statements.

Different between Unmodified and Unqualified Opinion

Unmodified Vs unqualified opinion:

Unmodified and unqualified opinion makes a lot of people confusing and even some auditors.

Before we explain the difference between these two terms, unmodified and unqualified opinion, we should guide you on which auditing standard that you should go to deal with audit opinion.

Some audit firms use local audit standards that allow and require by the local authority to perform their auditing works while most of the international audit firms use both local and international standards on auditing.

You can check this with your company’s annual audit report. It normally states in the standard of use section.

Assuming that ISA is the standard that we use to perform our financial audit and the standard we use to deal with issuing audit reports or opinions is ISA 700 as well as ISA 705.

Well, to deal with audit opinion based on international standards on auditing, the auditor should go to ISA 700 and ISA 705.

ISA 700 dealing with unmodified audit opinion and ISA 705 is dealing with modified opinion.

Now, that enough for which ISA we should go to deal with when issuing the opinion on financial statements based on audit standard. Now let move to the different between Unmodified Opinion and Unqualified Opinion.

Explaining the difference:

If you go to ISA 700 and searching for term unqualified, you will never found it.

Right?

Let try searching it by yourself, ok?

Do you know why?

Well, because IFAC did not use term unqualified in its standard to call or refer to the opinion express by the auditor to the financial statements that do not have any problem. The clean opinion.

But instead, it uses the term unmodified.

Unmodified is the official term to express such an opinion or to call such an opinion.

But unqualified is the term called by general accountant and auditor when they refer to that kind of opinion. So, there is no difference, it just the term. But the meaning is the same.

In conclusion, unmodified and unqualified opinions refer to the opinion issued by the auditor to the financial statements that they found no material misstatements.

In case auditors found that there is a material misstatement, they will issue a qualified or adverse opinion based on the materiality as well as their effect on the financial statements.

Sinra

Qualified audit report: Definition | Example | Explanation

Definition:

The qualified audit report is one of the three modified audit reports where the opinion is issued to the financial statements that are not prepared in all material respect while those misstatements are not pervasive.

Compare to the other two reports, this one is less serious than yet it is below the clean opinion.

The qualified audit report is different from the other two modified reports since the misstatement found by auditors effect only for the items themselves.

While adverse and disclaimer, the misstatements might be effect the whole financial statements.

The simple meaning of qualified audit report is that the accounting information that presents in the financial statements is not correct.

This could mean the accounting treatment is not follow accounting standards like IFRS, US GAAP or local GAAP.

In the qualified audit report, there is a qualified audit opinion that expresses by auditors and stating the reason why the qualified opinion is expressed.

Explanation:

Now assuming that you know what is the qualified report and the following is the explanation based on International Standard on Auditing (ISA) issued by IFAC.

Based on ISA 700, the auditor should express the unmodified audit opinion to the financial statements that they audit if they conclude and found no material misstatements.

And if, after their testing, and they concluded that the material misstatements found, and the client is not making adjustments as auditors recommend, then qualified opinion should be express in the qualified audit report.

But, just to be sure that those misstatements are not pervasive to financial statements.

That means that besides affecting themselves, the misstatements are not affected to other items in the financial statements.

To make sure the opinion issued to the client is done as it should be, the auditor should check and follow the recommendation and guidelines in ISA 700, and ISA 705.

Auditors should state the detail information related to qualified opinion in the basic opinion paragraph.

For example, detail of misstatements, how they are the effect, and what the standard said about that misstatement.

Then, in the qualified opinion paragraph, the auditor should statement clearly the financial statements that they audit, period cover, accounting standard they use to prepare financial statements, and conclusion of their opinion based on the misstatements found and state in the basis opinion paragraph.

Example:

Now you have understood the meaning and principle of the qualified audit report, and now let go to the example. For example, ABC engages with the Wiki accounting firm to audit its 31 December 2015 financial statements.

As a result of wiki accounting testing, it found and conclude that the account payable balance at the end of the period does not exist.

As the result of wiki assessment against ABC materiality set by the wiki, this misstatement is material, but not pervasive. Wiki tries to propose adjustments yet, management did not agree.

Wiki also explains the result of ABC rejection but ABC still not accept. Then, based on ISA 705, Wiki should express a qualified opinion to ABC financial statements.

Here is a sample:

Qualified audit opinion

Difference to other reports

While the unmodified report is issued to the financial statements that present true and fair view as well as compliance with the applicable law, the qualified report might be issued the financial statements that auditors found certain items of the financial statements are materially misstated. It is also possible that the qualified report is issued when then the scope of the audit is limited.

For example, the auditor might not be able to verify the existence of inventories balance that state in the balance sheet that backdates in two or three years. The reason is that they could not observe the inventories count at the year-end of dated that inventories were count.

In most cases, the qualified report is ok for both the management of the company as well as the regulator.

However, if the report is not clean like the disclaimer report as well as an adverse report, then the integrity of the report and management of the company is questionable.

Written by Sinra

Disclaimer Audit Opinion: Definition | Explanation | Example

Definition:

Disclaimer opinion issues by auditors to financial statements when they could not obtain sufficient and appropriate financial statements to draw the conclusion or support their opinion. There are many reasons why auditors could not obtain sufficient and appropriate supporting documents.

It can be because management does not have enough documents to support their accounting transactions or event. Managements do not have proper control to keep those supporting documents secured and subsequently lost.

There is the intention of the management of the entity not to provide the supporting documents due to a lack of trust in auditor independence.

Lack of communication and clarification is also one of the reasons that lead to misunderstanding and then subsequently leads to a lack of supporting documents.

For example, management does not trust auditors and they do not agree to provide the payroll list.

The auditor might also issue a disclaimer audit opinion if the major of transactions or events in the financial statements involve high judgment, and management could not justify those transactions or events sufficiently according to the accounting standard that they are using.

The following are the detailed explanation related to disclaimer audit opinion based on auditing standards along with an example that could help you get a better understanding of disclaimer opinion.

Explanation:

In term of seriousness, disclaimer opinion is more serious than qualified and adverse opinion.

But, sometimes this opinion can be rectified. We mean that the opinion can be changed from a disclaimer to qualified or even unqualified.

We will explain this in detail why it is serious than the other two opinions and why we can rectify this opinion to be better.

Look, it seem unprofessional to give these advice, but it is how some people did and get the better result.

Before we explain the seriousness of this opinion, and how to rectify it, let see the requirement from ISA 705 regarding disclaimer opinion first.

As per ISA 705, auditors shall disclaim their opinion or issued the disclaimer opinion on financial statements if they are unable to obtain sufficient and appropriate audit evidence to support their opinion.

Auditors could disclaimers opinion only if they conclude that, for the items or accounts, they could not obtain audit evidence, are material to financial statements, and also pervasive.

If the items or accounts are immaterial or material, but not pervasive, the auditor should issue a qualified opinion.

The other case that auditors might also issue disclaimers opinion is when there are many uncertainties on certain material items or areas where auditors could not verify and assured that those items or accounts are correctly prepared.

Example:

Noted: This is the simple example related to the situation where the auditor should express disclaimers opinion and it is just to justify our explanation above. In real practice, the detail of ISA 700, and ISA 705 is highly recommended to follow.

Example ABC is the audit client of CA accounting firms. CA is engaged to audit ABC’s financial statements for the year ended 31 December 2016.

Here are the summary of ABC financial statements:

  • Assets : USD 100,000,000
  • Liabilities: USD 50,000,000
  • Equity: USD 50,000,000
  • Gross Profit : USD 60,000,000
  • Profit before interest and tax: USD 30,000,000

Based on this financial highlight, the materiality of these financial statements, based on 5% of total assets is USD 5,000,000.

In balance sheet items, there a large number of accounts receivable USD 10,000,000, and CA is intended to perform its review on this balance by confirming balance to ABC’s customers.

Yet, ABC denied to let CA perform AR confirmation and do not allow CA to access related documents. The subsequent events review found that there is no payment from those customers yet.

Based on this situation, if auditors try to persuade the client to provide and allow them to assess that information but the client still rejects, the audit should issue a disclaimer opinion.

But, auditors should also inform the client about the subsequent of not provide the evidence and information to auditors before releasing the reports.

Example of Disclaimer of Opinion:

There are two subsections in the disclaimer of opinion. The first section is basic of the disclaimer and the second section is the opinion section.

Basically, the basis for the disclaimer section required the auditor to describe the situation and what kind of evidence or document that auditors face and could not obtain.

The auditor should also quantify the number of items or accounts that the requested documents and explanations are not provided.

As provided in the example above, the auditors could not obtain the evidence related inventories (quantity). In this case, they explain about nature, areas, and how those problems could affect the financial statement.

But, just because they could not obtain the documents, it does not mean that they are not correctly records or exist. That is why they disclaim their opinion to say whether it is right or wrong.

Adverse Audit Opinion: Definition | Example | Explanation

Definition:

An adverse opinion is the type of modified audit opinion that express in the audit report of financial statements where auditors have obtained all-sufficient and appropriate audit evidence and concluded that there are material misstatements found.

Auditor also draws the conclusion that those material misstatements are pervasive to all financial statements.

The misstatements are pervasive when that misstatement materially affects other items or transactions in financial statements and lead to users who use the financial statements to make an incorrect decision.

The International Standard of Auditing required auditors to express an adverse opinion if the material misstatements are found which significantly affect the whole financial statements.

Here is what ISA 705 defined adverse opinion:

The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements. Source: www.ifac.org

Why does adverse opinion matter?

This kind of opinion is the signal for shareholders and investors to noted that the financial statements of the entity are not reliable and they should not use or rely on the financial information to make a decision.

This also an alert to the shareholders that the executive’s people who run entity have some kind of problem-related to integrity.

Therefore, attention should be paid not only on the financial information but also on other reports that prepared by or report by executives.

From an auditor’s point of view, this opinion will adversely affect the client, and normally there will be serious react from the client’s management team.

So auditors should ensure that they have clearly understood the problems found and always following the audit guideline to make sure that auditors themselves are the ones who not misunderstood.

All relevant accounting standards are confirmed and checked against the mater points.

Auditors should also obtain the professional legal advice on the issued raise so that both perspectives: Accounting and Laws are come up with the same conclusion.

Example:

For example, if auditors found the material misstatements in the financial statements but those misstatements are not pervasive, then the qualified opinion should be issued.

If the misstatements are material and pervasive, the adverse opinion should be issued. If the auditor could not obtain evidence and the items that auditors could not obtain could be material and pervasive, disclaimer opinion should be obtained.

The following is the example of Adverse Audit Opinion from IFAC:

Example of Adverse Opinion

The basis for Adverse Opinion:

As you can see in the example above, there are two subsections in the opinion section of the audit report. First is the Basic for adverse opinion and second is the opinion.

On the basis of the adverse opinion section, auditors required to mention clearly the points that they are raising, how they affect the financial statement, and what standard that talks about these misstatements.

For example, if there is going concern problem found, auditors should state clearly what is the mater that leads them to conclude that the client has going concern problems and what is the accounting standard that auditing uses to assess with.

Adverse Opinion:

This is probably the most important section for both the client and the auditor. This section is the opinion section and what audit conclusion is.

Before concluding, the auditor should mention what they were discussing in the basic opinion, how they affect, name of the client, accounting periods, financial statement, and what standard they are using.

The auditor should not only state the name of the standard, but also the number and areas so that the reference could be checked.

Above is the example of an adverse audit opinion that expresses in the audit report, and this is just the sample wording only. If you have any questions related to this article or need more explanation, please drop your comment below.

Written by Sinra

Difference Between Unqualified and Qualified Opinion

Unqualified Audit Opinion:

This happens when auditors examine the entity financial statements and concluded that there is no material misstatement found. This opinion is different from a qualified opinion.

The unqualified audit opinion is the opinion that issue by auditors in their audit report on the financial statements when those financial statements are prepared and presents in all material respect and compliance with applicable accounting standards.

Unqualified opinion, however, is the term used to describe unmodified audit opinion.

For example, if you look into ISA 700, Forming Unmodified audit opinion, and searching for word unqualified opinion, then you will never found it.

The thing is that standard use words unmodified, but we normally use words unqualified or unmodified.

When the audit opinion expresses an unqualified opinion, that mean level of integrity of financial statements as well as management who oversee the entity also better than modified audit opinion.

This might be helped management to obtain more fund from shareholders, investors, and banks.

Qualified Audit Opinion:

The qualified audit opinion is a type of audit opinion where opinion is modified from the standard opinion as the result of financial statements are not present true and fair or not fairly present in accordance with the standard and application framework.

Normally, if the result of audit testing found that the financial statements are a present true and fair view, then the standard unmodified opinion will be issued.

But, if the result of testing found there are material misstatements, then the auditor will need to modify its opinion.

The qualified audit opinion is not a good report to the company and management as the qualified opinion may lead the users to question the integrity of the entity’s financial statements and management.

The audit report will be issued to those charged with governance as well as investors and shareholders. These group of stakeholders questions managements as the result of the qualified audit opinion.

Sometime, if the bankers also need this report to let them assess the financial stability of the entity and how integrity management is, the bankers might not provide the loan to the entity or stop to extend some term with the entity.