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Audit and Auditors under Companies Act

Audit Opinion

An auditor requires to form an audit opinion on whether the entity prepares financial statements considering all the material aspects. The material aspects shall be in accordance with the applicable financial reporting framework. An auditor shall conclude whether the financial statements are free from material misstatements, fraud or error.

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Audit Opinion

He decides whether they state the true and fair view. An auditor conducts the audit with a view to express a true and fair view of financial statements of an entity. He expresses an audit opinion on the financial statements of an entity on the basis of the audit evidence that he obtains.

An auditor shall evaluate whether the entity prepares the financial statements in accordance with the applicable financial reporting framework. Evaluation of financial statements will include its qualitative aspects, accounting policies and practices, and management judgment.

Auditor Shall Evaluate the Following Factors

  • Whether the entity appropriately follows and applies significant accounting policies while preparing financial statements. He also needs to evaluate that it makes appropriate disclosure regarding the same.
  • It follows the accounting policies on a consistent basis with the applicable financial reporting framework.
  • Estimates made by the management are reasonable or not.
  • The financial statements of an entity shall provide relevant, reliable easy to understand and comparable information.
  • Proper disclosures made for material transactions for a better understanding of intended users.
  • Terms used in financial statements are appropriate or not.

The auditor should state in the opinion paragraph whether the entity prepares the financial statements in all material respects. Also, it shall state whether it complies with the applicable financial reporting framework.

The auditor should state whether he has obtained sufficient and appropriate audit evidence. He should express his audit opinion on the financial statements of an entity as to whether the financial statements give a true and fair view in accordance with the applicable financial reporting framework and statutory requirements.

Learn more about Auditors Report here in detail.

Types of Audit Opinion

  • Unqualified opinion
  • Qualified opinion
  • Disclaimer of opinion
  • Adverse opinion

Audit Opinion

Source: freepik.com

Unqualified Opinion

An auditor expresses an unqualified audit opinion when he concludes that the financial statements of an entity are prepared in accordance with the applicable financial reporting framework, considering all the material aspects.

Auditor expresses an unqualified audit opinion when in his opinion and based on the information provided to him and audit evidence obtained by he considers that the financial statements of an entity give a true and fair view.

An unqualified audit opinion assures that any changes made in the accounting policies or method followed by the entity on a continuous basis and their effects have been considered and disclosed in the financial statements appropriately.

Modified Opinion

When an auditor expresses his opinion other than an unqualified audit opinion it is said he is modifying his opinion. When an auditor expresses a qualified opinion or disclaimer of opinion or an adverse opinion it is said he has modified his opinion.

Audit Report is Considered to be Modified when

Matters that do not affect the Auditor’s Opinion

There are some matters included in the financial statements which in the auditor’s opinion are of such importance that it is very useful for the users understanding of the financial statements.  In such cases, an auditor may modify his report by adding an emphasis of matter paragraph to highlight such matter for users understanding.

Adding an emphasis of matter paragraph does not affect the auditor’s opinion. An auditor modifies his opinion by adding an emphasis of matter paragraph if he considers that the going concern of an entity is questionable, uncertainty regarding future events which may affect the financial statements.

For Example: When there is uncertainty regarding pending litigation matters, such matters can be disclosed in the emphasis of matter paragraph.

Matters that affect the Auditor’s Opinion

There are some circumstances in the auditor’s professional judgment when he cannot express an unqualified audit opinion.

An auditor may modify his opinion when the effect of the matter has a material effect on the financial statements of the entity. Some circumstances are as follows:-

  • When there is a limitation on the scope of his work.
  • When there is a dispute with management regarding accounting policies followed, the method adopted.

Qualified opinion

The auditor shall express a qualified opinion when he concludes that unqualified opinion cannot be expressed and the misstatements individually or in aggregate are material but not pervasive as to require an adverse opinion or the limitation of scope is not material as to require a disclaimer of opinion.

The auditor should express a qualified opinion as being “subject to” or “Except for” the effects of material items which are qualified.

For example: When an auditor is unable to obtain sufficient and appropriate audit evidence regarding investment made in a foreign company. We consider the auditor’s inability to obtain sufficient and appropriate audit evidence material but not pervasive. Auditor’s opinion is Qualified for the misstatement.

Disclaimer of opinion

An auditor expresses a disclaimer of opinion when he is unable to obtain sufficient and appropriate audit evidence. Another reason is that he considers that the undetected misstatements could be both material and pervasive.

The auditor should disclaim an opinion when there is a limitation on the scope effect of which is both material and pervasive and he is unable to obtain sufficient and appropriate audit evidence.

Adverse opinion

An auditor expresses an adverse opinion when he considers that the misstatement is so material and pervasive that a qualification of the report is not adequate to disclose such misstatements of financial statements.

The auditor shall express an adverse opinion after obtaining sufficient and appropriate audit evidence.

Thus, on the basis of such evidence, he concludes that the misstatements, individually or in aggregate are material and pervasive to the financial statements.

Solved Example For You

Question: Differentiate between qualified opinion and adverse opinion.

Ans: An auditor expresses a qualified opinion when he considers that an unqualified opinion cannot be expressed and the misstatements individually or in aggregate are not so material and pervasive to the financial statements of the entity.

An auditor expresses adverse opinion when he considers that the misstatements either individually or in aggregate are both material and pervasive to the financial statements of the entity.

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