After having reviewed sufficient audit evidence, the auditor issues a negative opinion. He concludes that the financial statements are affected by the material misstatements and their combination. If the auditor finds that an auditee’s financial statements are materially misrepresented and not consistent with GAAP, then an adverse opinion is issued. An adverse opinion is the opposite to an unqualified. This basically means that the auditor finds the information in question is inaccurate, unreliable, or incomplete. The purpose of issuing the adverse opinion is to evaluate the auditee’s financial situation and operating results. A negative opinion can have severe consequences for the reporting organization in any event.
Investors, regulators, banks, governments rarely accept financial statements from an auditor if they are negative. They will usually ask the auditor to rectify the financial statements and obtain another audit report. Auditors will usually inform the company’s officers and accountants of problems before issuing adverse opinions. Auditors will work with the company’s officers and accountants to solve problems. If possible, auditors will work with them to correct problems. An audit report will include an adverse opinion paragraph between the scope paragraph and the opinion paragraph. The opinion paragraph will change to read, “because of circumstances mentioned in base for adverse opinion paragraph,”. The adverse report’s wording is identical to the qualified report. An explanation paragraph is added to the scope paragraph. The main difference between the qualified report and the adverse is the opinion section. Here, the auditor declares that the financial statements aren’t in conformance with GAAP.
Audit Opinion Disclaimer A disclaimer opinion is rarely issued. It is used when the auditor is unable to form an opinion and refuses to present one. A disclaimer of opinion may be issued by auditors when:
The auditor and the auditoree are not independent or have a material conflicts of interest.
The auditor may be restricted by scope, either intentionally or unintentionally, in his ability to obtain evidence and perform procedures.
It is highly doubtful that the auditor can continue to be a going concern.
A disclaimer opinion paragraph can be added to an audit report. It is located between paragraphs 1 and 2. The scope paragraph will now read “We have audited ABC Co. Ltd financial statements”, but the text does not say that the auditor actually completed the audit. The opinion paragraph will be amended to read “We don’t express an opinion on ABC Co. Ltd. financial statements due to the circumstances explained in Basis paragraph.”
The scope paragraph was not audited and is therefore omitted. The auditor must briefly explain the circumstances for the disclaimer in an explanation paragraph, similar to the adverse and qualified opinions.