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Types of Audit Report issued by Nepalese External Auditors

As a layman what are the things that we need to consider while reading the financial statements of an entity. Well there are numerous important schedules, account balances and disclosures which we shouldn't miss out but in this particular blog, we are trying to draw your attention to one of important element of the audit financial statement called "Audit Opinion".

Audit Opinion is the certification by the auditors (members of the Institute of Chartered Accountants of Nepal) that the financial statements prepared by the management is true and fair in accordance with the corroborative evidence reviewed and sampling test of transaction. It is independent and unbiased opinion usually on the letter head of the auditor, signed by the partner, and forms first page of the audit report.

There are, generally two types of Audit Opinion 1) Unqualified and 2) Modified. And, Among Modified there are three additional sub categories 1) Qualified Opinion, 2) Adverse Opinion, and 3) Disclaimer of Opinion 
Let's talk in detail scenarios when Auditor's generally issue these opinions:

1) Unqualified Opinion: Well if the financial statements got an unqualified opinion that's what you want. And, to be fair, 90% of the audit reports issued are generally unqualified in nature. What does it mean? It means:
  • the financial statements is free from any material errors that would have impacted user's decision
  • confirms compliance with Nepal Financial Reporting Standard (NFRS), Statutory Laws and Generally Accepted Accounting Principles (GAAP).
  • financial statements represents the entity's financial accounts fairly
2) Qualified Opinion: Qualified Opinion is issued when auditors agree that the financial statements prepared by the management is in conformance with NFRS, Statutory Laws, and GAAP except for few areas. This is generally a scenario where auditors observation is material and might affect user's decision. Instances where qualified opinion might be issued are:
  • Auditor's were not granted access to all the data required for the audit i.e audit scope limitation
  • Auditor's doubt the veracity of the financial statements presented along with the substantive evidence.
  • Auditor is not entirely confident that financial statements truly represents the financial accounts of an entity or complies with GAAP.
  • Auditors believes that report misstates or mis-classifies accounting entries.
3) Adverse Opinion: An adverse opinion has several consequences for the reporting entity. It is highly likely that financial statements will be rejected by the investors, regulators, lenders and government agencies. Generally, auditors work with the entity's management to correct the highly material errors so that they can issue qualified or unqualified opinion, however when they are not successful they end up expressing adverse opinion. When adverse opinion is issued, a specific paragraph describing the reasons. Instances where adverse opinion is issued are:
  • Financial statement do not fairly represent entity's accounts.
  • Financial statement do not comply with NFRS, statutory laws, and GAAP.
4) Disclaimer of Opinion: Disclaimer of opinion is a scenario where auditor is hesitant to issue any opinion on the financial statement. It means auditor is not sure about the financial statement is in accordance with NFRS, Statutory Laws, and GAAP or represent entity's accounts.  Auditor may issue disclaimer of opinion when they are can suppor their conclusion with substantive evidence otherwise, they might refrain to adverse opinion. Instances where adverse opinion is issued are:
  • Auditor cannot access the financial data.
  • Auditor believe that they cannot audit impartially. 
  • Auditor doubts the financial statements and/or accounting policy adopted by the entity.
Reading above paragraphs, we should now be able to differentiate between the different opinions and understand when auditors are likely issue different type of opinions. One of the basic thing that auditors consider while framing each of these decisions is "Materiality" and "Compliance".
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Location: Washington, DC, USA

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