The adverse audit report is issued when the auditor concludes that the financial statement does not present a true and fair view of it as a whole. In other words, a financial statement contains material and pervasive misstatement that impacts the financial statement.
In what circumstances can an adverse audit report be issued?
The following are some circumstances under which an this can be issued.
Going concern—According to the auditor, it’s challenging for the business to survive in the foreseeable future. This understanding might be based on challenges about cash flow/liquidity, profitability, competition, severe internal changes, and any other business reasons.
In this situation, the auditors issue an adverse report when the audit client prepares a financial statement assuming a going concern basis, which is not estimated to be in accordance with the auditor’s understanding. So, auditors perceive this misstatement as material and pervasive.
Non-compliance—A major non-compliance was observed in the preparation of financial statements. For instance, financial statements are prepared using a financial reporting framework other than the applicable/required reporting mechanism, or there is some material deviation from the applicable regulatory framework.
It’s important to note that for an adverse report to be issued, the material misstatement needs to be pervasive or impact the financial statement as a whole, not any specific account balance/transaction/disclosure.
Wrap up
Adverse audit reports are issued when the auditor concludes that the financial statement as a whole is impacted by a material misstatement referred to as pervasive.
Different scenarios can lead to the issuing of an adverse audit report, including going concern and non-compliance that impacts the financial statement as a whole.
Daniyal Khatri, ACCA, is a seasoned bookkeeping specialist with over a decade of experience in designing precise, compliant financial systems. His expertise spans daily transaction tracking, ledger management, and financial record accuracy, ensuring businesses maintain organized, audit-ready books. Daniyal excels at aligning processes with evolving compliance standards, integrating user-friendly tools to automate workflows, and translating regulatory complexities into actionable steps. By combining technical proficiency with a focus on clarity, he empowers organizations to achieve error-free bookkeeping, minimize risk, and build a foundation for informed financial decisions.
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