Disclaimer of Opinion
Disclaimer of opinion is the statement that independent external auditors issue saying that they do not express an opinion on the financial statements. The matter involved in this case is both material and pervasive.
However, unlike adverse opinion, auditors cannot form a basis of opinion either due to limitation of scope or involvement of significant uncertainties. In any case, the situation for the disclaimer of opinion is that auditors believe the matter is too material to even be able to express an opinion on the financial statements.
The disclaimer of opinion is usually the most serious type of audit opinion, comparing to other modified opinions such as qualified opinion and adverse opinion because auditors actually state that they are ‘unable to form an opinion’.
Auditors must disclaim an opinion when they come across the two circumstances in which:
- They could not obtain sufficient appropriate audit evidence in order to form their opinion on financial statements and
- They conclude that the transactions or balances that they could not obtain evidence on are both material and pervasive in financial statements.
Additionally, auditors may also disclaim an opinion when they face situations involving significant uncertainties or situations where they lack independence, e.g. due to financial interests.
3 Reasons for Disclaimer of Opinion
The three reasons that make auditors issue the disclaimer of opinion are included in the table below:
|Reasons for Disclaimer of Opinion
|Material Scope Limitation
|A material scope limitation exists when the client dictates conditions that make auditors unable to obtain sufficient appropriate audit evidence to form an opinion on financial statements. The reason that auditors could not obtain sufficient evidence may be due to the limitation placed by the client’s management.
It could be intentional where management refuses to provide auditors the supporting documents for certain transactions or balances. For example, management refuses to provide payroll list to auditors, for they concern on the confidential or other matters.
It could also be unintentional where the supporting documents requested by the auditors were lost due to a weak control on keeping the supporting documents.
In any case, intentional or unintentional, auditors could not perform their audit tasks due to the lack of evidence, hence they cannot complete all planned audit procedures. As a result, they cannot form an opinion. In the end, they have to give a disclaimer of opinion in audit report.
|Significant Uncertainty Exists
|Auditors may also disclaim an opinion when the rare circumstances involving uncertainties exist where they could not form the basis of opinion despite having obtained sufficient appropriate audit evidence regarding those uncertainties.
This is usually due to the potential interaction of the uncertainties and their possible cumulative effect on the financial statements.
|Auditors Lack Independence
|Disclaimer of opinion may also be issued when auditors cannot perform an audit in accordance with professional auditing standards due to the lack of independence with respect to the client.
In this case, one-paragraph disclaimer should be issued stating the lack of independence. However, the paragraph must not state the reasons of lack of independence or audit procedures. This is to avoid the possibility of the user second-guessing the auditor as to the independence or lack thereof.
Disclaimer of Opinion Example
An example of disclaimer of opinion in the audit report would look like below:
Independent Auditor’s Report
To the shareholders of
We were engaged to audit the financial statements of ABC Limited (“the Company”), which comprise the statement of financial position as at 31 December 2019, the statement of comprehensive income, the statements of changes in equity and cash flows for the year then ended, and note, comprising significant accounting policies and other explanatory information.
Basis for disclaimer of opinion
ABC Limited did not make a count of its physical inventory in 2019, thus we were unable to observe the physical quantities on hand. We were unable to satisfy ourselves by alternative means concerning the inventory quantities held at 31 December 2019, which is stated in the statement of financial position at $$$. As a result of this matter, we were unable to determine whether any adjustments might have been found necessary in respect of recorded or unrecorded inventories and the elements making up the statement of profit or loss, statement of changes in equity and statement of cash flows.
Disclaimer of Opinion
Because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the financial statements.
Disclaimer of opinion due to going concern
When preparing financial statements, the client’s management have the responsibility to assess the company’s ability to continue operation at least 12 months after the reporting date.
So, auditors have the responsibility to evaluate the management’s assessment of the company’s going concern.
Likewise, a disclaimer of opinion due to going concern is the case where auditors disclaim an opinion on financial statements because of the existence of material uncertainties related to the client’s going concern status or inability to obtain evidence about the client’s going concern assessment.
In this case, auditors may issue a disclaimer of opinion due to going concern for any of the two circumstances below:
- Material uncertainties: this is the case where the client’s assumption about going concern is appropriate but there are material uncertainties that auditors conclude that they are too severe to express an opinion on financial statements.
- Inability to obtain evidence about the client’s going concern assessment: this is the case where auditors could not obtain sufficient appropriate audit evidence about the client’s assessment of going concern due to the client is not willing to make or extend its assessment to at least 12 months after reporting date.
It is useful to note that regarding the material uncertainty that still exists after the conclusion that the client’s use of going concern assumption is appropriate, auditors usually issue only an unqualified opinion with emphasis of matter paragraph to disclose such uncertainty.
It is a rare case that auditors issue a disclaimer of opinion in this matter. It usually only happens when there are multiple material uncertainties that are significant to the financial statements.
Also, in the case of the inability to obtain evidence due to the client is unwilling to make or extend its assessment about going concern, auditors may issue only a qualified opinion if the matter is not so serious.