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Unit 11: Appointment, Right, Duties and Liabilities of an Auditor

11.6.3 Adverse or Negative Opinion Notes

If, based on his examination, the auditor does not agree with the affirmations to be made, the
auditor may give an adverse opinion. For example, the opinion given by the auditor is adverse
or negative when he states that the financial statements do not represent a true and fair view of
the state of affairs and the working results of an undertaking. An adverse opinion is appropriate
where the reservations or the objections of the auditor are so material that he feels that the
overall view of the accounts is materially distorted. Where the auditor gives an adverse opinion,
he should disclose all material reasons therefore.

Example: In case the company is engaged in hire purchase and finance business where
provision for doubtful debts was not made in spite of the fact that a sizeable proportions of
sundry debtors were not recoverable, the auditor is expected to state that the said accounts do
not give a true and fair view of the state of affairs of the company in as much as no provision for
bad and doubtful debts has been made.

11.6.4 Disclaimer of Opinion

If an auditor fails to obtain sufficient information which results in his inability to express an
opinion, he makes a disclaimer of opinion. The auditor may state that he is unable to express an
opinion because he has not been able to obtain sufficient evidence to form an opinion. The
necessity of disclaiming an opinion may arise due to many reasons. For example, the auditor
may not get access to all the books of account for any reason; there may exist material items, the
value of which may be totally uncertain, or, certain material information may not be forthcoming.
Whenever an auditor disclaims an opinion, he should give reasons for the same. For example,
the auditor could say that “we have not been unable to verify the existence and value of the fixed
assets of the company and, therefore, we are unable to state whether the balance sheet shows a
true and fair-view”. The right of a statutory auditor to give a qualified report is a great deterrent
and prevents the management of a company from resorting to accounting practices and methods
of disclosure which are not in accordance with the law. A qualified report is normally not
necessary, unless the issues involved are material. However, items requiring disclosure under
the law such as directors remuneration, whether material or not, have to be specifically disclosed.
If this is not done, it is the duty of the auditor to qualify his report. An auditor of a company is
appointed by shareholders to perform certain statutory functions and duties and it is expected of
him that he will in fact perform these functions and duties. The failure to perform a statutory
duty in the manner required is not excused merely by giving a qualification or reservation in
auditor’s report. In such circumstances, the auditor should, while giving a qualification or
reservation indicate clearly the reasons why he was unable to perform the audit in accordance
with generally accepted procedures and standards. In a majority of cases, items which are the
subject matter of qualification are not so material as to affect the truth and fairness of the
accounts, taken as a whole, but merely create uncertainty about particular item. In such cases, the
auditor may report that in his opinion, but subject to specific qualifications mentioned, the
accounts present a true and fair view. On the other hand there may be cases where the reservations
may be so material that it would be meaningless to state that subject to the qualifications, the
accounts disclose a true and fair view. The auditor then should make a disclaimer of opinion or
give an adverse/negative opinion, as appropriate. In this context, the nature of the facts, their
materiality and their bearing upon the truth and fairness of the accounts should be taken into
consideration. The auditors must give full information about the subject matter of their
qualification and not merely create grounds for suspicion or inquiry and leave it to the
shareholders to ascertain the facts by making diligent inquiry. The distinction between
“information” and “means of information” made in the London and General Bank’s case is still

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