Emphasis of Matter Paragraphs. Unqualified Opinion

What happens when the Auditor incorporates the four horsemen of the apocalypse: Emphasis of Matter paragraphs, qualified opinion, adverse opinion, and disclaimer of opinion?

Audit reports aim to facilitate commercial traffic. Although they do not function as guarantees, they do offer some peace of mind to the contracting parties, to financial workers, to all the stakeholders of commercial activities.

Therefore, an unmodified opinion that is simple or without modifications, not being a guarantee, facilitates commercial traffic, contracting activities, financing activities.

However, everything that is not unmodified opinions, make commercial traffic substantially difficult.

Structure of the Audit Reports: Paragraph Layout

As a general rule, the structure of the audit reports is characterized by having four essential paragraphs.

• A first paragraph called “scope paragraph”. This paragraph first identifies the documents that makes up the annual accounts. Then it refers to the auditing standards. And finally, it describes if the auditor has encountered some kind of limitation in his or her work.
• The second paragraph provides the details of the financial statements that had been determined by the board of directors.
• In the third paragraph, undoubtedly being the most relevant one, is where the auditor gives his or her opinion on the audited financial statements.
• And finally, in a closing paragraph, the auditor will briefly present a reference to the verification of the data contained in management’s report.

The Auditor’s opinion on the Financial Statements.

The audit reports can contain four types of opinions:

1. Unmodified opinions
2. Qualified opinions
3. Adverse opinion
4. Disclaimer of opinion

Unmodified Opinions

An unmodified opinion implies that the auditor was satisfied with the financial statements audited. This means that the statements met the requirements demanded by the regulations and they were prepared in accordance with accounting principles, criteria and standards. The statements agree with the information made available to the auditor about the entity’s business and inform on important aspects of the entity’s financial information.

Qualified Opinions

A qualified opinion is issued by the auditor when there are one or more audit evidences in relation to the annual accounts that could be significant as a whole. For example, the auditor could have had limitations in the scope of his or her work. This could be due to the refusal of the company to deliver certain documents or information, or that there had been an accidental destruction of certain records required to carry out the auditing process. Auditors would also issue a qualified opinion when there are certain uncertainties, i.e. issues or situations that have unknown final outcomes (including litigation, lawsuits, claims).

Adverse Opinions

On the contrary, an adverse opinion indicates that the statements reported do not show the true image of a company’s assets, nor of its financial situation. In this case, the auditor would have found errors, breaches of accounting principles and rules, defects in the presentation of information. Such circumstances would affect these statements significantly. And in any case, they must indicate in the opinion paragraph that the financial reports do not express the true state of the company.

We might think that auditors would to give adverse opinions due to lack of evidence of the information obtained. However, in most cases, they are given due to the limitations of the scope of auditing and/or uncertainties that have significant importance.

Hence, it is fundamental for auditors to be able to issue an opinion that captures important situations and facts, and for that they must follow the so-called Norma Técnica de Auditoría sobre el concepto de “importancia relativa” or Technical Standard of Auditing: on the Concept of “Materiality.” The International Auditing and Assurance Standards Board (IAASB)

also issues standards on auditing that outlines the process of determining materiality.

Disclaimer of Opinion

The fourth type of modified opinions is known as the disclaimer of opinion. Auditors would insert such disclaimer in situations where they were unable to obtain sufficient and appropriate audit evidence on which to issue another type of opinion. They would generally conclude the possible effects on the financial statements should there be an undetected errors or misstatement, whilst these errors could be both material and pervasive.

Conclusion

Auditing standards help and guide auditors to, along with professional experience, assess situations that would lead them to give one opinion or another.

The standard on materiality relates to the audited entity to a predetermined magnitude. For example, the turnover rate, debt, etc … These items would be listed on the standard with a percentage relative to the entity. Usually these percentages are listed on the standard itself. They would serve as limit to categorize an entity’s situations and circumstances into insignificant, significant or very significant, and thus helping auditors to determine unmodified opinions, qualified opinions, adverse opinions or disclaimer of opinions.

Finally, what are the Emphasis of Matter paragraphs? They are widely used by auditors in their reports when they consider it is necessary to draw attention to a certain issue from financial statements. These paragraphs are inserted immediately after the opinion paragraphs. The Emphasis of Matter paragraphs should reference to a specific matter that was referred in the financial reports. These paragraphs would not modify the opinions of the auditors, they simply highlight a situation that would have high relevance to a correct understanding of the entity´s financial statements.