An audit is a systematic and independent examination of financial information, records, transactions, operations, or processes of an organization to assess their accuracy, completeness, and compliance with established standards, regulations, and best practices. The primary objective of an audit is to provide assurance to stakeholders, such as investors, shareholders, creditors, and the general public, that the information presented by the organization is reliable and trustworthy.
Qualified Audit Opinion: is issued when the auditor has identified certain issues or limitations in the financial statements but does not believe they are significant enough to warrant an adverse opinion. In a qualified opinion, the auditor will explicitly state the nature of the qualification, explain why the opinion is not unqualified (clean), and provide the reasons for the qualification in the audit report.
The auditor may issue a qualified opinion when:
- There is a limitation on the scope of the audit due to circumstances beyond the auditor’s control (e.g., the auditor could not obtain sufficient evidence in a specific area).
- There is a departure from the applicable financial reporting framework in the financial statements, but the departure is not material.
- There is a lack of adequate disclosure in the financial statements, but the omission is not material.
Adverse Audit Opinion: is issued when the auditor concludes that the financial statements as a whole are not presented fairly in accordance with the applicable financial reporting framework. The auditor issues an adverse opinion when the issues identified affect a substantial portion of the financial statements or the overall financial position, results of operations, or cash flows.
The auditor may issue an adverse opinion when:
- When the auditor identifies material misstatements in the financial statements that are widespread, affecting a substantial portion of the financial statements, they cannot be corrected by management.
- Violation of accounting standards and regulatory requirements
- When the auditor is unable to obtain sufficient and appropriate audit evidence to support the amounts and disclosures in the financial statements due to issues like lack of documentation, incomplete records, or restrictions on access to information,
- If there are significant uncertainties or events that raise substantial doubt about the organization’s ability to continue as a going concern for the foreseeable future and adequate disclosures are not provided in the financial statements,
The requirements for an auditor to issue an unqualified (clean) audit opinion include the following:
- The financial statements must comply with the relevant accounting standards and principles, such as International Financial Reporting Standards (IFRS).
- The financial statements must provide adequate and transparent disclosures of significant accounting policies, estimates, and other relevant information. This includes information about contingent liabilities, related-party transactions, and other items requiring disclosure.
- The financial statements must be consistent with prior periods in terms of accounting policies and presentation unless there is a valid reason for a change and the change is appropriately disclosed and accounted for.
- The financial statements should not contain any material misstatements. Materiality is a key concept in auditing and refers to the threshold at which an error or omission would influence the decisions of financial statement users. Auditors assess materiality based on factors like the size, nature, and context of the misstatement.
- The auditor must gather sufficient and appropriate audit evidence to support their opinion. This evidence includes an examination of financial transactions, testing of internal controls, and confirmation of account balances with third parties.
- The auditor must have unrestricted access to all necessary records, documents, and personnel within the audited organization. Any significant limitations on the scope of the audit could result in a qualified or adverse opinion.
- The auditor should evaluate whether there are any significant uncertainties or events (e.g., litigation, going concern issues) that could cast doubt on the entity’s ability to continue as a going concern. If such uncertainties exist, they should be adequately disclosed in the financial statements.
- Management Representation
- The auditor must exercise professional judgment throughout the audit process and conclude that, based on the evidence gathered, the financial statements are fairly presented.
How does an auditor assess the going concern of a business during an audit?
- Evaluate Management’s Plan
- Review Financial Information
- Consider External Factors
- Assess Liquidity and Solvency
- Evaluate Contingent Liabilities
- Evaluate Debt Agreements
- Consider Mitigating Factors
- Document Finding