An adverse opinion is when auditors conclude that the business’s financial statement contains material misstatement. The opinion of auditors is based on the audit procedures performed by them. Further, the performance of the audit procedures is dependent on the risk of material misstatement found by auditors during the preliminary stage of risk assessment.
On the other hand, a disclaimer of opinion is when the auditor concludes that they could not obtain sufficient and appropriate audit evidence by the performance of the audit procedures. It may be a due limitation of scope imposed on them. The limitation may be due to different reasons. For instance, accounting records were unavailable due to a fire in the business premises last year, or the management did not allow the audit team to access accounting books and records. In simple words, such a situation was created where the audit team could not obtain sufficient and appropriate audit evidence. Hence, auditors decided to form and issue a disclaimer on the financial statement.
Further, it’s important to note that disclaimer and adverse opinion are only issued when misstatement is material and pervasive otherwise opinion is qualified.
Detailed understanding adverse opinion and disclaimer
The audit of the financial statement initiates from risk assessment of the business. The risk assessment is carried by understanding the business, assessing internal controls of the business, and reviewing/analyzing the business’s financial statement.
Separate questionnaires or documents can be prepared to identify the risk, and a specific rating is allocated to the identified risks. For instance, different risks can be allocated like high, medium, and low depending on the risk outcome.
This rating/allocation of the risk enables the auditor to allocate the extent of the audit procedures to be performed. For instance, if the risk is allocated a higher rating, there is a need to perform extensive audit procedures. For instance, if the risk is higher, the auditor can plan both control testing and substantive procedures to collect sufficient and audit procedures.
So, after the performance of audit procedures, if the auditors conclude that they could not get sufficient and appropriate audit evidence, they issue a disclaimer of opinion. On the other hand, if the auditors conclude a material misstatement in the financial statement, an adverse opinion is issued. However, it’s important to note that both disclaimer and adverse opinion are issued when misstatement is material and pervasive in the financial statement. On the other hand, if the misstatement is material, a qualified audit opinion is issued and not disclaimer/adverse.
Material and pervasive means if the impact of misstatement is so significant that it will impact the multiple balances and facts in the financial statement, it’s said to be material and pervasive. For instance, not following GAAP/IFRS provisions in the preparation of financial can lead to material and pervasive misstatement.
On the other hand, materiality is about a single account balance. For instance, depreciation expense might contain an error and lead to over/understating the expense in the financial statement.
An adverse opinion is formed by auditors when there is a material and pervasive misstatement in the financial statement. On the other hand, when auditors conclude that they could not collect sufficient and appropriate audit evidence on the risk of material misstatement and misstatement is material and pervasive, they form a disclaimer of opinion.
Further, if a misstatement is concluded to be material, opinion is qualified.