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.
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:
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.
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