Adverse Opinion Details

An adverse opinion is a professional review made by an auditor after having counterchecked the account's books, records, and inventory. Using this information, the auditor can determine its actual financial state. An audit is usually conducted on companies to make sure that the financial statements presented by them are indeed true.

Lenders require financial statements to lend the company money and investors need them to make a decision as to whether or not they invest in the company.

Audits vs. Adverse Opinions

An audit is an ultimate assurance that an establishment's financial statements are true. The auditor's feedback is an adverse opinion. When an auditor's opinion is marked "unqualified" or "clean," it means that a company's financial statements and records are accurate and complete.

However, if the auditor's opinion of the financial records offered by a company is "null and void," it shows that the statements are inaccurate and can be termed null and void.

An audit can either be conducted by internal or external auditors whereby the internal auditors are employees of a company while the external ones come from CPA firms. The only difference between an internal and external auditor is in the sense that an external auditor has an independent method through which they used to conduct their auditing process. If the auditor gives a bad review of a company's financial statements then that can be referred to as an adverse opinion that represents misinformation in the records.

Example of Adverse Opinion

Imagine that you are an accountant in a company that deals in home accessories and appliances whereby you distribute appliances from manufacturers to retailers and consumers. You have a very heavy buy/sell traffic which basically means that you have many transactions among you, retailers, and some cases, consumers too. Your job is to keep account of all these transactions carried out by the company and to issue a formal financial statement at the end of every financial year. This statement is very vital to your company since it determines whether debtors and creditors would want to invest money in your company or not.

Therefore, it's your responsibility to make sure that all the records of the transactions carried out by the company are accurate and complete. At the end of every financial year, your company hires an external auditor from a Certified Public Accountant firm to countercheck all your records and make sure that the information in the financial statement is accurate. The auditor is supposed to ensure that all the balance sheets, income, and cash flow statements are accurate and match your company's inventory. If you did a good job in the financial year, it means that the auditor will approve the statement and wave off any form of doubts as to whether the bank statements are accurate.

However, if the auditor comes across some misrepresentation of information by your company, the audit will be termed as qualified which means that you or your company might have done some miscalculations or misrepresented your records. The auditor has the responsibility to issue an adverse opinion which only shows that the financial statements are inaccurate.

Significance of Adverse Opinion

Adverse opinions might be issued due to some serious crimes like fraud or they might also be due to a simple mistake made by an accountant or a bookkeeper. So it's important for accountants to carefully avoid any form of adverse opinion after an audit.

Adverse opinions are issued when there is a contradicting financial statement after an audit has been performed on a company. Audits are a compulsory process by many companies if they have any plans to want to attract debtors or creditors and, therefore, they need to keep account of all their transactions.

If an auditing process flags any form of inaccuracy or misinformation it's within the powers of an auditor to issue an adverse opinion. Essentially, every company or business establishment should strive to keep a clean and clear record to avoid the possibility of an adverse opinion on their financial statements.