In the world of Finance, audit opinion plays an important role in assessing the credibility of a company's financial statements.
However, under certain conditions, auditor may give an opinion does not express an opinion on the audit conducted
When this happens, it means that the auditor does not give an opinion on the audited financial statements.
So, what is an opinion not expressing an opinion and what is the basis for giving such an opinion? Find the answer in the following article!
What Is the Definition of a Disclaimer of Opinion?
Unrepresented opinion is a statement issued by the auditor stating that the auditor did not provide an opinion regarding the client's financial statements.
An auditor disclaims an opinion when the auditor cannot obtain sufficient appropriate audit evidence and concludes that the possible effects of undetected misstatements are both material and pervasive (SA 705 Revised 2021, paragraph 9).
Opinion does not express an opinion is also called disclaimer of opinion, or often abbreviated disclaimer opinion in everyday conversation.
A disclaimer of opinion in an audit differs from a disclaimer of liability on a website or product. The word opinion here means the auditor's opinion on the fairness of the financial statements.
What Is the Basis for a Disclaimer of Opinion?
Opinion base not expressing an opinion is when the auditor cannot obtain sufficient evidence to give an opinion on the fairness of the financial statements.
This happens due to the presence of significant restrictions in the scope of the audit, such as the inability to access important data necessary for the examination.
As a result, the auditor cannot ascertain whether there are material errors in the financial statements that could affect the overall information presented.
According to SA 705, there are two main conditions:
- The auditor cannot obtain sufficient appropriate audit evidence, and the possible effects of undetected misstatements are both material and pervasive (paragraph 9).
- In very rare circumstances, there are multiple uncertainties whose cumulative effect makes it impossible for the auditor to form an opinion, even though sufficient evidence was obtained on each individual uncertainty (paragraph 10).
Effects are pervasive when they are not confined to specific elements, accounts, or items, represent a substantial proportion of the financial statements, or are fundamental to users' understanding of the financial statements (paragraph 5).
If management imposes a scope limitation, the auditor first asks management to remove it, communicates it to those charged with governance, and considers alternative procedures. If the effect is material but not pervasive, the auditor gives a qualified opinion. If it is material and pervasive, the auditor withdraws from the audit where possible, or disclaims an opinion if withdrawal is not possible (paragraphs 11 to 13).
Giving this opinion does not only mean that the auditor does not give an opinion, but rather the recognition that they cannot conduct a thorough audit.
Thus, it is not possible for auditors to provide guarantees related to the fairness of financial statements.
This opinion is often viewed negatively because the auditor has no basis to give an opinion on the financial statements. The causes vary and do not automatically mean there is manipulation.
Examples Of Opinions Not Expressing Opinions
The appendix of SA 705 contains two illustrations of reports with a disclaimer of opinion. Both are paraphrased below.
- A single element: the auditor cannot obtain evidence on an investment in a foreign joint venture worth more than 90% of the group's net assets, because there is no access to the joint venture's management or its auditor.
- Multiple elements: the auditor was appointed after year end and so could not observe the physical inventory count, and a new receivables system produced many errors.
A Real Case: Tiga Pilar Sejahtera Food
Katadata reported on 24 February 2020 that PT Tiga Pilar Sejahtera Food Tbk received a disclaimer of opinion on its restated 2017 and 2018 financial statements. According to that report, the reasons included the auditor not being given access to audit significant accounts at two subsidiaries or affiliates, no financial data from an entity that was bankrupt and managed by a curator, and a material uncertainty about going concern. This summary is drawn from news reporting, not from the auditor's report.
Does a Going Concern Problem Always Lead to a Disclaimer of Opinion?
No. If a material uncertainty about going concern is adequately disclosed, the auditor gives an unmodified opinion with a separate section titled Material Uncertainty Related to Going Concern (SA 570). If the disclosure is inadequate, the auditor gives a qualified or adverse opinion. A disclaimer of opinion arises only in very rare circumstances involving multiple uncertainties (SA 705 paragraph 10).
What Are the Implications of a Disclaimer of Opinion for Business?
Opinion not expressing an opinion is not just an ordinary audit opinion but has serious implications for the company including.
1. Loss Of Trust Stakeholders
When auditors give this opinion, it can lead to loss of confidence from various stakeholders such as investors, creditors, and regulators.
This opinion indicates that the auditor cannot provide assurance on the fairness of the financial statements so that outsiders doubt the stability and credibility of the entity.
2. Impact On Reputation
Companies that accept opinions do not express opinions may experience a decrease in reputation in the market.
For listed companies, the Indonesia Stock Exchange assigns a special notation "D" to issuers that receive a disclaimer of opinion. The opinion can also affect how investors and creditors view the company.
3. The Need For Remedial Measures
In some cases, not expressing an opinion can signal a serious problem that needs to be addressed immediately.
The company must take corrective steps such as in internal control, the financial reporting system, and accessibility to the information the auditor needs.
4. Influence on the decision-making process
This opinion can also influence managerial and strategic decisions within the entity.
Decision makers may need to review budgets, projections, or investment plans based on the fact that their financial statements have not been adequately audited.
What Changes in the Auditor's Report When a Disclaimer of Opinion Is Given?
- The Opinion section is titled Disclaimer of Opinion, and the Basis section is titled Basis for Disclaimer of Opinion.
- The statement that the auditor audited is changed to say that the auditor was engaged to audit.
- Unless required by regulation, the report does not include Key Audit Matters (SA 701) or Other Information (SA 720).
What Are the Tips for Avoiding a Disclaimer of Opinion?
To avoid unreasonable audit opinions, companies need to ensure that important aspects have been carried out, namely:
1. Implement effective Internal controls
Effectiveness internal control not only ensure the financial statements produced are accurate.
However, internal control must produce also a solid system for managing financial risks and liabilities with high transparency.
2. Building a strong financial policy
Developing a clear financial policy and adhering to Generally Accepted Accounting Principles is a good first step.
This policy simplifies the reporting process and reduces the potential for errors that could affect the auditor's opinion.
3. Do Review Periodically
Conducting regular reviews of financial policies and controls by the internal audit team helps the company identify potential problems early.
This allows for improvements before an external audit is carried out thereby reducing the risk of problems that could harm the audit opinion.
4. Use Software As A Solution
Internal audit management software can help organize audit planning, documentation, and follow-up, so data is easier to prepare when external auditors request it.
Where Does a Disclaimer of Opinion Stand Among the 4 Types of Audit Opinions?
A disclaimer of opinion is one of the most serious opinions, together with the adverse opinion, because it sits at the meeting point of two problems at once: insufficient audit evidence, and effects that spread (are pervasive) across many parts of the financial statements. Here is how it compares with the other three opinions, based on the nature of the problem and its scope:
| Nature of the issue | Material, not pervasive | Material and pervasive |
|---|---|---|
| The financial statements contain a misstatement | Qualified opinion | Adverse opinion |
| The auditor is unable to obtain sufficient evidence | Qualified opinion | Disclaimer of opinion |
If the evidence limitation is not pervasive enough to obscure the statements as a whole, the auditor gives a qualified opinion, not a disclaimer. Read the complete comparison of the four opinion types in the pillar article on audit opinion, or learn about unqualified, qualified opinion, and adverse opinion each one individually.
FAQ About Disclaimers of Opinion
What is a disclaimer of opinion?
A disclaimer of opinion or disclaimer of opinion is the auditor's statement that they are not giving an opinion on the client's financial statements — not merely withholding an opinion, but an admission that the audit could not be performed thoroughly.
What is the basis for issuing this opinion?
The auditor cannot obtain sufficient evidence to assess the fairness of the financial statements, usually due to significant limitations in the audit scope such as the inability to access key data. As a result the auditor cannot confirm whether material errors exist.
What happens if the scope limitation is removed?
Before the report is issued, the auditor asks management to remove the scope limitation. If it is removed and sufficient evidence can be obtained, the auditor can give a different opinion. If not, the auditor considers a qualified opinion, withdrawal, or a disclaimer of opinion (SA 705 paragraphs 11 to 13).
What does an example case look like?
Examples in the SA 705 appendix: the auditor cannot obtain evidence on a large investment in a foreign joint venture, or cannot observe the physical inventory count. A reported real case: PT Tiga Pilar Sejahtera Food Tbk for the 2017 and 2018 financial statements.
What are the implications for the company?
The trust of investors, creditors, and regulators may fall, market reputation is affected, and listed issuers receive special notation D from the Indonesia Stock Exchange. The company also needs to take corrective action promptly, and managerial decisions such as budgets and investment plans need to be reviewed.
How can a disclaimer of opinion be avoided?
Apply effective internal controls, build clear financial policies in line with generally accepted accounting principles, manage supporting document archives, prepare data access for auditors, have the internal audit team review regularly before the external audit, and plan physical inventory counts before year end.
Does a going concern problem automatically lead to a disclaimer of opinion?
No. A material uncertainty about going concern that is adequately disclosed results in an unmodified opinion with a separate section (SA 570). A disclaimer of opinion arises only in very rare circumstances involving multiple uncertainties.
Is a disclaimer of opinion the same as an adverse opinion?
No. With an adverse opinion, the auditor has obtained sufficient evidence and concludes the financial statements are materially and pervasively misstated. With a disclaimer of opinion, the auditor does not have the evidence to reach a conclusion.
Conclusion
Opinions do not express opinions given by auditors when they are unable to obtain sufficient evidence to assess the fairness of a company's financial statements.
This can result from significant limitations in the scope of the audit such as the inability to access critical data.
Audithink is internal audit management software that can be customized. Audit teams can use it for risk assessment, audit planning, work program templates, notifications, follow-up monitoring, and automated reports. Audithink does not determine the external auditor's opinion. If you are interested, please request a demo.
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