Disclaimers of opinion - last resort for auditors

An audit report is not an evaluation of whether an entity is a good investment but is focused instead on the integrity (material truth and fairness) of an entity’s financial statements. As such, auditors have a professional obligation to provide a level of comfort as to whether the financial statements fairly and accurately reflect the operations of an entity during the relevant period.  

Due to COVID-19 and the uncertainty that its created, we’re starting to see more modifications being made to audit reports, including disclaimers of opinion. 

What is a disclaimer of opinion?

This type of audit report modification is only used when the auditor has exhausted all avenues to get the evidence needed to form an opinion that provides some level of comfort over the financial statements.

Why is a disclaimer of opinion given?

There are several reasons why an auditor might issue a disclaimer of opinion.  

Missing or unreliable financial information can be a driver and includes things like gaps in the financial records, such as details of significant transactions being lost due to changes in key personnel or misplaced records. 

Significant inherent uncertainties can also contribute to an auditor issuing this type of modified opinion. For example, a disclaimer of opinion will be issued where there is significant uncertainty relating to going concern. In this instance, an auditor may have concerns about the level of uncertainty surrounding future cash flow forecasts or the future forecast borrowing levels of an entity. This has been exacerbated in the current COVID environment due to the uncertainty around future operating conditions for many entities due to lock downs, border closures and red light settings.

An inability by the auditor to complete all the audit procedures required for significant balances might also cause the auditor to disclaim. The auditor may not have been appointed until after the inventory count was completed and is unable to substantiate inventory balances by normal and/or additional procedures.

Where balance dates have occurred during COVID-19 lockdowns, we’ve seen auditors go to extraordinary lengths to complete inventory stock takes from a safe distance, such as using drones to verify inventory levels, to avoid the need to issue a disclaimer. Some auditors have performed inventory counts at a time other than year end with additional procedures to cover the intervening period, to ensure that they can get comfort over inventory balances.

Not given lightly

It is important to highlight that although we’re seeing more disclaimers of opinion than in pre-COVID times, we would expect this type of modified opinion to only be issued as an absolute last resort.

An auditor will only issue a disclaimer when they have exhausted all reasonable means to issue an opinion which provides a greater level of comfort to users of the financial statements. They’re also not done at the stroke of a pen - rigorous quality management and approval processes exist that audit firms work through before a disclaimer can be issued.  I can assure you auditors are doing their absolute best to ensure that disclaimers of opinion are the exception rather than the rule.

John Kensington is a Member of the External Reporting Board and Vice Chair of its Auditing and Assurance Standards Board.

Editor’s note:

The External Reporting Board (XRB) receives modified audit reports due to statutory requirements. All modified audit reports received are reviewed to inform decisions about whether changes to accounting or assurance standards need to be made.
This review by the XRB provides another check and balance in the financial reporting eco-system which ensures the standards issued by the XRB are fit for purpose.

Published: 31 March 2022