Financial statements are prepared annually for the purpose of review and decision making by the intended users. It’s therefore imperative that the information presented in a set of financials be as fairly stated as possible.

International standards on auditing define the purpose of an audit as to enhance the degree of confidence of the intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are fairly presented, in all material respects.

The area of financial reporting is complex, with a lot of role players each with different responsibilities, making it difficult to understand the auditor’s responsibility and interpret the auditor’s opinions correctly. I’ll swiftly touch on some key concepts below.

What types of opinions can be issued?

The 4 types of audit opinions are unqualified, qualified, adverse and disclaimer of opinion.

1. An unqualified opinion is the “best” outcome, implying that the financials are free from material misstatement, based on audit procedures performed. The auditor’s opinion is expressed without any reservations, or “qualification”, hence the term “unqualified opinion”. This can also sometimes be referred to as a “clean opinion”.

2. A qualified audit opinion then becomes rather obvious. It is expressed when the auditor could not obtain sufficient evidence to support certain material balances or, after having obtained sufficient audit evidence, concludes that there is a material misstatement on the financial statements. The effect of the misstatements is, however, restricted to specific elements of the financial statements or, in other words, the effect is not pervasive to the financial statements as a whole.

3. An adverse opinion is similar but more serious. It is expressed when the auditor, having done the work, concludes that misstatements, individually or in the aggregate are material as well as pervasive to the financial statements, i.e. the effect of the misstatement can be felt throughout most of the financial statements.

4. A disclaimer of opinion is expressed when sufficient audit evidence could not be obtained but the uncertainty, or even misstatement, is deemed to be material and pervasive. The auditor is therefore not able to express an opinion on the financial statements and has to “disclaim” the opinion.

How much reliance can one place on an audit report?

Audit procedures are performed using various techniques including detailed analytics, tests of the financial controls and verification of transactions and balances. Audit procedures are mostly performed on a sample basis and therefore do not give the user absolute assurance of the financial statements being free from any misstatement. That’s why we use phrases such as “fair presentation” and “in all material respects”.

When is something deemed to be material?

From the above terminology it is clear that materiality is an important concept. Information is deemed material if it will influence the economic decision making of the intended users of financial statements. A significant amount of professional judgement is used by the auditor when determining materiality and often sparks extensive debates in the profession due to its subjectivity.

In conclusion, the auditor’s report is a key document to any user of the financial statements and it is imperative that it be correctly interpreted as it provides the user with reasonable assurance on the information presented to them in the financials. Review your latest report and see if you can identify which of the four reports has been issued. Look for the following clues:

1. “The financial statements are fairly presented …” (unmodified or clean opinion).
2. “The financial statements are fairly presented, except for …” (qualified opinion).
3. The financial statements do not present fairly …” (adverse opinion).
4. “We are unable to express an opinion …” (disclaimer)

Eckard Bergh

Director, Johannesburg

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