Types of audit opinions

  1. Unqualified opinion
  2. Qualified opinion
  3. Disclaimer of opinion
  4. Adverse opinion
      1. Unqualified opinion

When the auditor is satisfied in all material respects that enables him to express the required opinion on the financial statements without any reservations. This is sometimes called a clean opinion. This is expressed when the auditor concludes that the financial statements give a true and fair view in accordance with the relevant financial reporting framework.

Emphasis of matter report:

There are occasions when the auditor has no reservations as to the financial statements but where there exists an unusual event, condition or accounting policy, he feels that unless the reader’s attention was drawn to the unusual matter the reader may not reach a proper understanding of the financial position and results. In such circumstances the auditor should express an unqualified opinion but also include an extra paragraph called on ‘Emphasis of matter’ paragraph to draw the readers attention to the unusual matter.

The addition of such an emphasis of matters paragraph does not lead to a qualification of the audit opinion but is intended to enable the reader to obtain a better understanding. To avoid this being understood as a qualification the emphasis of matter should be included after the opinion paragraph and should contain the phrase “without qualifying our opinion above”

Practical examples of emphasis of matter

  1. An unusual condition would include distraction of assets after the balance sheet date but the company remains a going concern.
  2. The company being insolvent on the face of its own balance sheet but the auditor has letters of support which he is satisfied can be fulfilled by the other party. Thus he will accept the appropriateness of the going concern assumption. Unusual events could include changes in legislation that could have a material impact on the entity’s business subsequent to the balance sheet date. Unusual accounting policies that may lead to an emphasis of matter would usually involve those matters not covered by any accounting standard such as accounting for agricultural produce or livestock
  3. Inherent uncertainties that may call for emphasis of matter would include contingencies at the balance sheet date which have not been resolved as at the date of signing the auditor’s report.
  4. They could also include negotiations for financing which have not been finalized by the date of signing the auditors report.

Qualifications in audit reports

When the auditor has reservations on any matter that is considered material to the financial statements he may introduce qualifying remarks in his audit report. The auditor’s reservations could arise out of the following;

  1. There is a limitation on the scope of his work;
  2. There is a disagreement with management
  3. There is a significant uncertainty affecting the financial statements, the resolution of which is dependent upon future events.
      1. Qualified audit opinion (except for opinion)

This is expressed when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with management or limitation on scope is not so material and pervasive as to require an adverse opinion or disclaimer of opinion. A qualified report implies that all other aspects of the financial statements are okay except for the effects of the matter to which the qualification relates.

      1. Disclaimer of opinion

This is issued when the possible effect of a limitation on scope or uncertainty is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and as a result he is unable to express an opinion on the financial statements. A disclaimer of opinion implies that the auditor is unable to form an opinion because sufficient audit evidence could not be obtained.

      1. Adverse opinion

This is expressed when the effects of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements. The auditor states that due to the nature of the disagreement in his opinion the financial statements do not show a true and fair view.

Limitation of scope

If for any reason the auditor is unable to receive all the information and explanation he deems necessary for the purposes of his audit then there has been a limitation in the scope of his work. It means that the auditor is unable to conclude objectively.

This could arise due to the following circumstances:

  1. Refusal by management to allow the auditor to examine certain documents or records.
  2. If the auditor is denied the opportunity to carry out an auditing procedure he considers important and he cannot conclude through alternative procedures, then there is a limitation of scope.
  3. Destruction of accounting records or documents through fire or other disaster meaning that such records are not available to be examined by the auditor.
  4. Being appointed auditor after the year-end with the result that certain evidence will not be collected.
Effect of a limitation in scope on the auditor’s opinion

If the possible effect of a limitation on scope of an audit is material but not fundamental to the financial statements the auditor issues a qualified opinion (except for opinion)

If the possible effect of a limitation on scope of an audit is of fundamental importance that the auditor is unable to express an opinion on the financial statements, the auditor issues a disclaimer of opinion as mentioned above.

When there is a limitation on the scope of the auditor’s work that requires the expression of a qualified opinion or disclaimer of opinion, the auditor should describe the nature of the limitation in his report and indicate the possible adjustments to the financial statements that might have been determined to be necessary, had the limitation not existed.

Inherent Uncertainties

Inherent uncertainties result from circumstances in which it is not possible for the auditor to reach any objective conclusion as to the outcome of a situation due to the circumstances themselves rather than a limitation on scope of the audit. Such uncertainties are only resolved through the passage of time e.g. to wait for the outcome of a litigation however time is a great constraint and Financial Statements must be prepared within the required time. The auditor should form an opinion on the adequacy of the accounting treatment of such inherent uncertainty. This will involve consideration of:

  • The appropriateness of any accounting policies adopted by management in treating the effect of such uncertainties.
  • The reasonableness of the estimates included in the Financial Statements.
  • The adequacy of disclosure.

Some inherent uncertainties are fundamental. These are uncertainties where the degree of uncertainty and its potential impact on the view given by the financial statements may be very great. In determining whether an inherent uncertainty is fundamental the auditors consider:

  • The risk of the estimate included in the Balance Sheet may be subject to change.
  • The range of possible outcomes.
  • The consequences of those outcomes on the view given by the financial statements.

Inherent uncertainties are considered as fundamental when they involve a significant level of concern about the validity of the going concern basis or other matters whose potential effect on the Financial Statements is unusually great.


Under disagreement the auditor is able to conclude objectively. He has received all the information and explanations he considers necessary for the purpose of the audit. But his conclusion is at variance with the position adopted by management or the view given by the accounts.

Circumstances giving rise to disagreements include:

  1. Application of inappropriate accounting policies by management;
  2. They can disagree on amounts and facts included in the financial statements. E.g. the auditor might feel that the amount provided for as a contingent loss arising from a legal suit against the company is too low.
  3. They can disagree on interpretation of an accounting standard or even legislation.
  4. Disagree as to the manner or extent of disclosure of facts or amounts in the financial statements.
  5. They can disagree on the mode of the disclosure of information.

Where the auditor disagrees with the accounting treatment or disclosure of a matter in the financial statements and in the auditor’s opinion the effect of that disagreement is material to the financial statements, the auditor should;

  1. Include in his report a description of all the factors giving rise to the disagreement;
  2. The implications of such factors on the financial statements;
  3. A quantification of the effect on the financial statements.

Effects of disagreements on the audit opinion

When the auditor concludes that the effect of the matter-giving rise to the disagreement is so fundamental that the financial statements are misleading the auditor should issue an adverse opinion.

If the nature of the disagreement is material but not fundamental the auditor should issue a qualified opinion indicating that all other aspects of the financial statements are okay except for the matter giving rise to the disagreement.

Material but not pervasive

Auditors may not include qualifying remarks in their audit reports unless the matter is material. Material but not pervasive means that the reservation that the auditor has is material in the context of a segment of the financial statements but not the financial statements taken as a whole.

Material and pervasive

A matter becomes material and pervasive when it is material in the context of the financial statements taken as a whole. A limitation of scope becomes pervasive when it makes the financial statements misleading for decision-making purposes or of little information of value for decision-making purposes. A disagreement becomes pervasive when it makes the financial statements taken as a whole to be totally misleading.

Qualification matrix

This summarises the forms qualification issued by the auditor under different circumstances.

Nature of circumstance  Material but not significant Fundamental
Limitationon scope/uncertainty Qualified opinion (except for opinion)  Disclaimer of opinion
Disagreement Qualified opinion (except for opinion) Adverse opinion