What is an Adverse Opinion? Explanation According to ISA 705
An adverse opinion will be given in two cases. First when financial statements are materially misstated. Adverse opinion may be because of inability of auditors to obtain sufficient and appropriate evidence. Keep in mind that adverse opinion is only given when the effect on the financial statements is material and pervasive.
An adverse opinion is given when:
- There are material misstatements in financial statements, and/or
- Auditors are unable to obtain sufficient and appropriate audit evidence, and
The effect on financial statements is material and pervasive.
What is material and pervasive effect?
The effect is material when it can affect the decision of the users of financial statements.
A pervasive effect is not confined to just single line item of financial statement. Such a type of misstatement effects a substantial portion of the financial statements. ISA 705 also include those effects that are fundamental to understanding of the user.
As you now, auditor assess risk of material misstatement at assertion level and financial statement level. Audit assertions are tested and verified.
What type of Adverse opinion Format to use?
Whenever auditors consider it necessary to provide adverse opinion, they shall state their opinion in the auditor’s opinion section. It depends on the reporting framework. We have two reporting frameworks:
- Fair Presentation Framework, and
- Compliance Framework.
The audit opinion in both these is slightly different.
Fair Presentation Framework
In the auditor’s opinion, because of the significance of the matter(s) described in the Basis for Adverse opinion section: (This statement is same in both frameworks)
The accompanying financial statements do not present fairly in accordance with the applicable financial reporting framework
The accompanying financial statements have not been prepared, in all material respects, in accordance with the applicable financial reporting framework.