Explainer: The language of audit opinions

Standard/unmodified audit opinion

Getting a “standard” audit report with an unmodified audit opinion means, in the auditor’s view, the information they looked at is a fair reflection of what actually happened, and the information is in keeping with the many practices and international standards on how to set out the financial statements.

In other words, the auditor didn’t spot anything significant enough that raised an eyebrow or needed pointing out to the reader.

It’s still important for governors and managers to read the reports to governors and management. The auditor will have spent a lot of time and effort on the audit and they often have suggestions for improvement. The most effective organisations appreciate an independent pair of eyes looking over their performance and practices.

Non-standard/modified audit opinions

If the auditor issued some form of “non-standard” opinion, it can indicate several things. A non-standard opinion can range from the equivalent of throwing your hands up in the air and walking away through to highlighting a specific matter for the readers.

There are different types of non-standard audit opinions:

Adverse opinion 

These opinions are quite rare and mean the organisation put something in the annual report that made the auditor think “No!” It’s a serious disagreement between the organisation and the auditor.

The adverse opinion is like an alarm sounding – the reader should not be relying on the content to give them a solid view of the organisation's finances or what it has delivered in services to the public. When you see an adverse opinion, the auditor will use words like “material misstatement” and “pervasive”.

• Material means that whatever hasn’t been reported properly in the financial statements is big enough to matter from a reader's perspective. There is no hard-and-fast rule about how much money counts as material – it all depends on how much money that organisation is dealing with. Material for some is small change to others. Material can also be about the “nature” of the item that caused the error and what the circumstances were.
• Pervasive means that it isn’t an isolated problem – it affects so much that the information that’s been reported, as a whole, is misleading.

Disclaimer of opinion 

When the audit opinion uses the words disclaimer of opinion, that’s a “huh?” result. The auditor can’t give the organisation a clean bill of health, because the auditor couldn’t do a lot of what they needed to do for large parts of the audit.

It means that the organisation couldn’t provide the auditor with enough evidence and that has limited the work of the auditor.

A disclaimer of opinion is material and pervasive because it affects a lot of the information. 

Qualified opinion 

When the audit opinion is qualified, it means something different again. This time, whatever it is that the auditor disagrees with, it’s material – it matters – but it isn’t pervasive. So the audit opinion is saying “yes, this information does fairly reflect what the organisation has been doing and how it has used our taxes or rates – except for...”

Sometimes, the auditor has got all the evidence they need and concludes that the content that isn’t stated right (called “misstatements”), individually or together, is material but not pervasive. The auditor could have concerns about the pages of financial information or the information about how well the organisation performed in providing people with services, or both.

Other times, the auditor hasn’t been given or found enough evidence, and the information that’s missing could make a difference to a reader’s understanding of the audited bits of what’s in the annual report. It could be material, but the auditor doesn’t think it’s pervasive and they say “we’ve got all the evidence we need – except for…”

And then there's...

... an emphasis of matter 

Sometimes the auditor will want to highlight something. They want to draw the reader’s attention to something that’s important to how the reader understands what’s in the audited bits of the annual report.

An emphasis-of-matter paragraph in the audit report doesn’t mean that anything’s wrong, but if you’re reading the annual report then you ought to know about whatever the auditor’s drawing your attention to.

The emphasis-of-matter paragraph is the auditor’s way of saying “Make sure you take a note of this.”

Sometimes the words “going concern” crop up here. The auditor might give an unmodified opinion – but highlights to the reader that the organisation is dependent on the continuing support of its bankers.

If the organisation is in a position to carry on, then all the financial information is put together assuming that the business is a going concern. If it’s winding up, then the team preparing the financial statements won’t use the going-concern basis to prepare the financial statements.

... and other matters

There’s one other sort of paragraph that the auditor can use. The auditor can include an other matter paragraph if something isn’t quite in keeping with the auditor’s expectations or isn’t made clear enough to the reader.

Whatever the other matter is, it’s something that the auditor wants to explain about the audit that hasn’t been highlighted by the organisation in its annual report.

Page last updated: 24 January 2023