Analysis of Audit Opinion and Rationale for Financial Reporting

This assignment analyzes the different types of audit opinions an auditor can issue, namely qualified, adverse, and disclaimer of opinion, and the rationale behind each. It explains when each opinion is appropriate, focusing on the significance of audit evidence and misstatements in financial statements. The adverse opinion is deemed most appropriate in a scenario where a company used outdated valuations, leading to material misstatements. The document emphasizes the importance of accurate asset valuation for stakeholders to make informed decisions, highlighting the ethical implications of misrepresentation and the necessity of a new valuation to reflect the true financial standing of the firm. References to relevant research papers support the analysis.

Running head: QUESTION 3: AUDIT OPINION AND RATIONALE 1
Question 3: Audit Opinion and Rationale
Name
Institution

QUESTION 3: AUDIT OPINION AND RATIONALE 2
QUESTION 3: AUDIT OPINION AND RATIONALE
(c): There are three types of audit opinion that an auditor can give to a firm based on the
particular scenario. These include; qualified opinion, adverse opinion or disclaimer of opinion. A
disclaimer of opinion is issued where the auditor, being unable to obtain the adequate appropriate
evidence of audit on which to anchor the opinion. Therefore, the auditor makes a conclusion that
that the feasible effects on financial statements of the undetected misstatement, might, if any, be
both pervasive and material. This means, therefore, that the auditor, cannot offer a qualified or
adverse opinion on the firm and hence has to settle on the disclaimer of opinion (Vichitsarawong
& Pornupatham, 2015).
The second type is qualified opinion. It is arrived at whereby having acquired adequate
appropriate evidence, an auditor, therefore, make concludes that individually/in aggregate, the
misstatements remain material, however, not pervasive to the organization’s financial statements.
The last type of opinion is adverse opinion. This type of the audit opinion is the most
appropriate to be given in this case. This is because it is given whereby the auditor has obtained
the sufficient relevant audit evidence and hence proceed to make a conclusion that
misstatements, on aggregate/individually, remain pervasive and material to financial statements
(Tsipouridou & Spathis, 2014). Therefore, this opinion fits this scenario. This is because the
directors never requested for another valuation based on an incorrected belief that market values
stood fairly stable over the previous five years.
Thus, the company in Melbourne errored by including the balance sheet on the basis of
outdated valuation undertaken five years ago. Therefore, the there is an adequate appropriate
audit evidence to back the position taken by the auditor in this case. This is because, definitely
this misstatement will affect other financial statement as the value of the factory given does not

QUESTION 3: AUDIT OPINION AND RATIONALE 3
reflect the current state of affairs (Abad, Sánchez‐Ballesta & Yagüe, 2015). This means that
relying on this value would be adversarial to other company stakeholders and even to itself.
Thus, there is a need for a new valuation in order that presented figure in the balance reflects the
true standing of the firm.
With the new valuation, the firm will be able to represent the true value of the factory in
its balance sheet. Thus will not only be legal but also ethical. The firm stakeholders’ would want
to assess the firm’s true position and material misstatement hampers their assessment. Thus, for
the both the firm and stakeholders to benefit, there is always a need for the company to report
true figures in its balance sheet to enable the stakeholders to make right decision to work with
the firm or not (Chen, He, Ma & Stice, 2016). Thus will make the firm ethical and many
stakeholders will associate with such a firm relative to its competitors. Thus, there is always a
need for a firm to value its assets at the end of each year to present a true reflection of its status.
Where there is not done, the auditors will have no choice but to give an adverse audit opinion.

QUESTION 3: AUDIT OPINION AND RATIONALE 4
References
Abad, D., Sánchez‐Ballesta, J. P., & Yagüe, J. (2015). Audit opinions and information
asymmetry in the stock market. Accounting & Finance.
Chen, P. F., He, S., Ma, Z., & Stice, D. (2016). The information role of audit opinions in debt
contracting. Journal of Accounting and Economics, 61(1), 121-144.
Tsipouridou, M., & Spathis, C. (2014, March). Audit opinion and earnings management:
Evidence from Greece. In Accounting Forum (Vol. 38, No. 1, pp. 38-54). Elsevier.
Vichitsarawong, T., & Pornupatham, S. (2015). Do audit opinions reflect earnings
persistence?. Managerial Auditing Journal, 30(3), 244-276.