The external auditor of the company will issue a report of the disclaimer if he is not able to form an opinion about the ‘true and fair’ view of the financial statements of the company.
The reason why he is not able to form an opinion is that he could not obtain sufficient and appropriate audit evidence to support an audit opinion. This lack of ‘sufficient and appropriate’ audit evidence may be related to any one of the significant areas of the financial statements or multiple areas.
This extreme case of disclaimer of audit opinion would arise when the auditor concludes that possible effects of undetected misstatements could be both material and pervasive. There might be different examples of the cases when a disclaimer of opinion is appropriate.
These examples are listed below:
- When auditor required certain documents, but management refused to provide these documents to auditors on account of confidentiality or any other reason. These documents may include payroll slips, ownership documents or related party transactions etc.
- The finance team is not able to provide specific accounting records due to circumstances beyond its control, for example, a virus that deleted accounting records or a natural disaster.
- The management did not perform a particular evaluation or assessment, e.g., an impairment evaluation is required, but the management does not believe so. Similarly, the management did not carry out a required provisioning exercise for bad debts.
- Impact assessment for a specific contingency might be difficult at the time of issuance of the audit report. For example, a legal case decided against the company imposing hefty fines and restrictions and the company has filed an appeal. The court shall require a significant time to decide on this petition.
- Where going concern assumption cannot be substantiated with reasonable certainty.
- Where the company appointed its auditor at such a time (or due to some other reason), that auditor was not able to attend annual inventory count. Another case is, the company refuses to send balance confirmation letters to its receivables and banks.
- Where the company replaced its accounting system with a new system, and there had been multiple issues in the implementing like incorrect data transfer, lost data, duplication of entries, and lost connectivity time etc.
In the case of a disclaimer of opinion, the external auditor would prepare audit report mentioning that they are not able to form an audit opinion on the financial statements of the company indicating the reasons of the same.