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 opinions based on auditing standards along with an example that could help you get a better understanding of disclaimer opinion.

Explanation:

In terms 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 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.

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

Auditors could disclaim 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 is 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 is a large number of accounts receivable USD 10,000,000, and CA is intended to perform its review on this balance by confirming the balance to ABC’s customers.

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Yet, ABC denied letting CA perform AR confirmation and does 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 it, the audit should issue a disclaimer opinion.

But, auditors should also inform the client about the subsequent of not providing 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 to 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 recorded or exist. That is why they disclaim their opinion to say whether it is right or wrong.