Question

Explore what impact the different auditor’s opinion will have on the audited organization, its employees and its stakeholders. Do you feel it is absolutely necessary to audit an organization every year if they have continuously been issued a clean audit opinion? Why or why not?

Answer 1

Auditor's opinion has a significant impact on the audited organization, its employees and its stakeholders. It helps in the decision-making process of the employees/trade union and the stakeholders with respect to the audited organization. Also audited organization has its reputation at stake. Here is how different types of opinion impact the audited organization and their stakeholders :

1. Clean/Unmodified opinion : This opinion is the best opinion which every organization hopes for. An unmodified/unqualified opinion is passed when the financial statements of the organization from material misstatements. It means that the to the best of knowledge of auditor and as per the facts represented by the management to the auditor, auditor expresses an opinion that the financial position and statement of affairs as depicted by the company in its financial statements are true and fair as per the auditor.

This has a very positive impact on the image and reputation of the audited organization. It will also have a positive impact for the shareholders as a clean opinion might lead to an increase in the share price of the company which will be very beneficial for the existing shareholders. Also trade unions could find useful information in the disclosures made by the company in its financial statements as well as from the cash flow and the financial position of the company for their negotiations with the company regarding better policies for the employees or for an increase in wages of employees.

2. Modified Opinion : Modified opinion is of the following 3 types :

a) Qualified Opinion : This opinion is passed by the auditor when the financial statements are materially misstated, however the impact of material misstatement is not pervasive enough to warrant an adverse opinion. As to the impact that a qualified opinion will have on the stakeholders or the organization is a highly subjective matter as it depends on the auditor's "Basis for Qualified Opinion". If the qualified opinion is on the basis of a simple administrative regulatory matter like late filing of any statutory document or late holding of an AGM, that will not tarnish the image of the company. It is also possible that the matter due to which a qualified opinion is being passed might affect a single stakeholder like government in our above example, however it might have no impact on any other stakeholder.

b) Adverse Opinion : This is the worst opinion for any organization and it can also tarnish the image of the company very badly. This opinion is passed when the financial statements are materially misstated and the impact of material misstatement(s) is pervasive. It means that there is a material misstatement in the financial statements due to which the financial statements are not representing a true and fair view of the financial position of the company. This has a very negative impact both on the audited organization and also all of the stakeholders which may include employees, creditors, government, shareholders etc. Adverse opinion can be due to any number of reasons. It is possible that the company has an on-going highly litigative case and the company has not disclosed the same which is very dangerous for its stakeholders as the company might be on the verge of going bankrupt and they will not even be aware of such a situation. On the other hand it can also be because of any default in payment of borrowings due to poor cash flow which will impact the creditors.

In any case, adverse opinion is almost definitively going to lead a fall in the share price of the company leading to loss for the shareholders of the company.

c) Disclaimer of an opinion : This opinion is passed when the auditor has not been able to obtain sufficient and appropriate evidence so as to warrant the expression of an opinion. This type of opinion can break the reputation of the audited organization in the market and the trust of stakeholders. People can make a number of interpretation from such an opinion. Some shareholders might think there is a fraud going on in the company and hence the company is not providing the required data to the auditors and at the same time some other people may think that the company's operations are in a very bad shape.

Yes, it is absolutely necessary to audit an organization every year even if they have continously been issued a clean audit opinion due to 2 very basic reasons. First, it is the statutory obligation for every company to get their accounts audited every year, failure of which will entail heavy penalties and might even lead to imprisionment. Secondly, even if a clean opinion is issued every year, it does not provide assurance of the fact that a clean opinion will be issued in the current year also. A clean opinion in the past years is only an indication of the fact that that year's financial statements are free from material misstatement. Drawing a conclusion that if the past years opinion is clean, the same will be true for the current year is inappropriate. There is always a possibility that a fraud has occured in the current year or there was a change in accounting policy which has not been accounted for properly or there might be a significant doubt regarding going concern arising in the current year due to market factors. It can be any other possible reason.

Hence it becomes absolutely necessary to audit an organization every year even if a clean opinion has been passed continously over the past years.