When investing in a company, investors need to consider some independent and professional opinions and the auditor’s opinion is worthy of reference. An auditor’s opinion is a conclusion by an independent qualified accountant about whether the information in a company’s financial statements is free from material misstatement that may have been caused by fraud or errors. Financial statements are free from material misstatement when the information they contain complies with the accounting requirements. A misstatement is material if it may affect decisions about investing in the company made by investors.
There are four types of auditor’s opinion:
- Unmodified Opinion
An unmodified opinion is called a clean opinion. It means that the auditor has concluded that the information in the financial statements is free from material misstatement.
The auditor may add a paragraph of “emphasis of matter” to draw attention about a significant matter in the financial statements of which investors should be aware. The auditor can only add such a paragraph if the information about the matter is free from material misstatement.
- Qualified Opinion
A qualified opinion is a clean opinion that is subject to one or more exceptions. Those exceptions may indicate that:
- The auditor does not have enough evidence to conclude on information in the financial statements about a particular matter or matters; or
- Information in the financial statements about a particular matter or matters is not free from material misstatement.
- Adverse Opinion
An adverse opinion means that the auditor has concluded that there are material and pervasive misstatements of the information in the financial statements that undermine the reliability of the financial statements as a whole. Therefore, it means that the auditor has concluded that the financial statements are not free from material misstatement.
- Disclaimer of Opinion
A disclaimer of opinion means that the auditor is unable to form a conclusion because the auditor is unable to obtain enough evidence about whether there are misstatements of information about matters in the financial statements that are potentially material and pervasive.
A disclaimer of opinion or an adverse opinion indicates that the financial statements may not be, or are not, free from material and pervasive misstatements. Investors should pay careful attention to listed companies with these types of auditor’s opinion when making decisions about investing in the listed companies.
Under the Listing Rules, if a listed company publishes its preliminary annual results announcement and its auditor has issued, or has indicated that it will issue, a disclaimer of opinion or an adverse opinion on its financial statements, its securities will be suspended from trading. Such suspension requirement may not be imposed if the disclaimer of opinion or adverse opinion is solely related to going concern, or the issues giving rise to the disclaimer of opinion or adverse opinion have been resolved before publishing the preliminary results announcement. The suspension will remain in force until the listed company has addressed the issues giving rise to the disclaimer of opinion or adverse opinion.
Auditors plays a crucial role in enhancing the degree of investor confidence in the financial statements and safeguarding the interests of investors.
About the AFRC
The Accounting and Financial Reporting Council is an independent body established under the Accounting and Financial Reporting Council Ordinance. As an independent regulator, AFRC spearheads and leads the accounting profession to constantly raise the level of quality of professional accountants, and thus protects the public interest.
For more information about the statutory functions of the AFRC, please visit https://www.afrc.org.hk.