1 Understanding Basics
Auditor is duty bound to express his opinion on financial statements in a written report whether financial statements are giving true and fair view of the business. If they do, the auditor expresses an unmodified opinion.
Unmodified opinion simply means that financial statements are free from material misstatements. However, things are not always good. And auditor may conclude that expressing an unmodified opinion is incorrect then auditor has to modify his opinion.
Under what situation modification is necessary and how is that carried out in auditor’s report, all of this other relevant guidelines are provided in ISA 705.
2 Modification of opinion – reasons
Auditor is required to modify his opinion in auditor’s report if:
- Audit evidence obtained indicates and auditor concludes on its basis that financial statements are materially misstated (presence of evil – confirmed)
- Auditor is unable to gather sufficient appropriate audit evidence so as to conclude that financial statements are free from material misstatements (absence of good – good is not confirmed)
Above two points implies one very important thing i.e. auditor cannot declare something good if he do not have enough evidence to support it.
Putting it in easy words, something is not good unless and until you are very sure that it IS good. If you don’t know it is bad this does not automatically mean that it might be good.
3 What is modified opinion?
An opinion in the auditor’s report is said to be modified if it is:
- Qualified opinion – a conditional opinion also known as “except for” opinion. An opinion according to which except for certain aspect of financial statement everything else is true and fair.
- Adverse opinion – an opinion in which auditor declares that financial statements as a whole are not giving true and fair view.
- Disclaimer of opinion – It is not really an opinion rather a statement that no opinion can be formed due to absence of sufficient appropriate audit evidence.