What is an auditors disclaimer of opinion?

Auditor's Opinion

When investing in a company, investors need to consider some independent and professional opinions a

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08/09/2021

When investing in a company, investors need to consider some independent and professional opinions and the auditor’s opinion is worthy of reference. An auditor’s opinion is a conclusion by an independent qualified accountant about whether the information in a company’s financial statements is free from material misstatement that may have been caused by fraud or errors. Financial statements are free from material misstatement when the information they contain complies with the accounting requirements. A misstatement is material if it may affect decisions about investing in the company made by investors.

There are four types of auditor’s opinion:

• Unmodified Opinion
  An unmodified opinion is called a clean opinion. It means that the auditor has concluded that the information in the financial statements is free from material misstatement.

  The auditor may add a paragraph of “emphasis of matter” to draw attention about a significant matter in the financial statements of which investors should be aware. The auditor can only add such a paragraph if the information about the matter is free from material misstatement.

• Qualified Opinion
  A qualified opinion is a clean opinion that is subject to one or more exceptions. Those exceptions may indicate that:
  • The auditor does not have enough evidence to conclude on information in the financial statements about a particular matter or matters; or
  • Information in the financial statements about a particular matter or matters is not free from material misstatement.
  Such exceptions are limited to specific account balances, transactions or disclosures.
• Adverse Opinion
  An adverse opinion means that the auditor has concluded that there are material and pervasive misstatements of the information in the financial statements that undermine the reliability of the financial statements as a whole. Therefore, it means that the auditor has concluded that the financial statements are not free from material misstatement.
• Disclaimer of Opinion
  A disclaimer of opinion means that the auditor is unable to form a conclusion because the auditor is unable to obtain enough evidence about whether there are misstatements of information about matters in the financial statements that are potentially material and pervasive.

A disclaimer of opinion or an adverse opinion indicates that the financial statements may not be, or are not, free from material and pervasive misstatements. Investors should pay careful attention to listed companies with these types of auditor’s opinion when making decisions about investing in the listed companies.

Under the Listing Rules, if a listed company publishes its preliminary annual results announcement and its auditor has issued, or has indicated that it will issue, a disclaimer of opinion or an adverse opinion on its financial statements, its securities will be suspended from trading. Such suspension requirement may not be imposed if the disclaimer of opinion or adverse opinion is solely related to going concern, or the issues giving rise to the disclaimer of opinion or adverse opinion have been resolved before publishing the preliminary results announcement. The suspension will remain in force until the listed company has addressed the issues giving rise to the disclaimer of opinion or adverse opinion.

Auditors plays a crucial role in enhancing the degree of investor confidence in the financial statements and safeguarding the interests of investors.

About the Financial Reporting Council

The Financial Reporting Council (FRC) is the full-fledged independent listed entity auditor regulator for Hong Kong. It is committed to upholding the quality of financial reporting of listed entities of Hong Kong so as to enhance investor protection and strengthen investor confidence in corporate reporting.

For more information about the statutory functions of the FRC, please visit www.frc.org.hk.

What Is a Qualified Opinion?

A qualified opinion is a statement issued in an auditor's report that accompanies a company's audited financial statements. It is an auditor's opinion that suggests the financial information provided by a company was limited in scope or there was a material issue with regard to the application of generally accepted accounting principles (GAAP)—but one that is not pervasive.

Qualified opinions may also be issued if a company has inadequate disclosures in the footnotes to the financial statements.

Key Takeaways

• A qualified opinion is one of four possible auditor's opinions on a company's financial statement.
• The other auditor's opinions are unqualified, adverse, or a disclaimer of opinion.
• A qualified opinion indicates that there was either a scope limitation, an issue discovered in the audit of the financials that were not pervasive, or an inadequate footnote disclosure.
• A qualified opinion is an auditor's opinion that the financials are fairly presented, with the exception of a specified area.
• Unlike an adverse or disclaimer of opinion, a qualified opinion is generally still acceptable to lenders, creditors, and investors.
• The auditor's opinion is usually found in the third and final section of an auditor’s report.

Understanding a Qualified Opinion

A qualified opinion may be given when a company’s financial records have not followed GAAP in all financial transactions, but only if the deviation from GAAP is not pervasive. The term "pervasive" can be interpreted differently based on an auditor's professional judgment. However, to not be pervasive, the misstatement must not misrepresent the factual financial position of the company as a whole and should not have an effect on the decision-making of financial statement users.

A qualified opinion may also be given due to a limitation of scope in which the auditor was not able to gather sufficient evidence to support various aspects of the financial statements. Without sufficient verification of transactions, an unqualified opinion may not be given. Inadequate disclosures in the notes to the financial statements, estimation uncertainty, or the lack of a statement of cash flows are also grounds for a qualified opinion.

How a Qualified Opinion Is Represented

A qualified opinion is listed in the third and final section of an auditor’s report. The first section of the report outlines management’s responsibilities in regards to preparing the financial statements and maintaining internal controls. The second section outlines the auditor’s responsibilities. In the third section, an opinion is given by the independent auditor regarding the company’s internal controls and accounting records. The opinion may be unqualified, qualified, adverse, or a disclaimer of opinion.

A qualified opinion states that the financial statements of a corporate client are, with the exception of a specified area, fairly presented. Auditors typically qualify the auditor's report with a statement such as "except for the following," when they have insufficient information to verify certain aspects of the transactions and reports being audited.

A qualified opinion is not so severe that it indicates that a business is doing poorly or that a company has hidden or falsified information, but rather, that the auditor simply cannot give an issue free report. The auditor may specify that they believe the overall audit to be true and factual but will specify the area that they believe is the issue.

Qualified Opinion vs. Other Opinions

A qualified opinion is a reflection of the auditor’s inability to give an unqualified, or clean, audit opinion. An unqualified opinion is issued if the financial statements are presumed to be free from material misstatements. It is the most common type of auditor's opinion.

If the issues discovered during the audit result in material misstatements that would affect the decision making of the financial statement users, the opinion is escalated to an adverse opinion. The adverse opinion results in the company needing to restate and complete another audit of its financial statements. A qualified opinion is still acceptable to most lenders, creditors, and investors.

In the event that the auditor is unable to complete the audit report due to the absence of financial records or insufficient cooperation from management, the auditor issues a disclaimer of opinion. This is an indication that no opinion over the financial statements was able to be determined.

What is an auditor's disclaimer of opinion?

When should the auditor issue a disclaimer of opinion?

What does it mean to disclaim an opinion?

What is the difference between adverse opinion and disclaimer of opinion?