Audit Opinion And Corporate Governance

Posted on 11 May 2019

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Auditing is one important element in corporate governance. It is a control mechanism to monitor conduct and performance, and to secure or enforce accountability, through financial reporting.

Therefore, the audit report (also known as the audit opinion), is the culmination process which the auditor collects and evaluates the sufficient and appropriate evidence, about the assertiveness of true and fair in the financial statement presented by the management.

There are four types of audit opinion, i.e. unqualified, qualified, disclaimer and adverse. To illustrate the differences, I use the audit reports of public listed companies in Malaysia as examples.

Firstly, if the auditor found the financial statement conforms the approved accounting standards, the auditor ought to issue an unqualified opinion.

However, in certain circumstances, e.g. due the limitation of scope which the auditor is unable to obtain the information or explanation he thinks necessary, or the auditor disagree the views expressed by the management in the financial statement (especially on the accounting standard or accounting policies adopted), then it would not be appropriate for the auditor to issue an unqualified opinion or a clean report.

Therefore, the auditor may issue a qualified opinion, which indicates the auditor is comfortable that the financial statement did present an overall true and fair view, except there is a scope limitation or disagreement with material consequences.  

On 2 April 2019, it was reported, IHH Healthcare Bhd’s external auditor, KPMG, has issued a qualified opinion on its financial statements (for the financial year ended on 31 Dec 2018). This was because after KPMG took into account of IHH’s acquisition of Fortis Healthcare Ltd and its subsidiaries on 13 Nov 2018, and KPMG is unable to determine if there are any regulatory non-compliances and additional adjustments or disclosures which may be necessary.

The auditor may issue a disclaimer opinion, which indicates means the auditor is unable to give an opinion on the financial statements. This happens when there is a limitation of scope which is material and pervasive, and the auditor is unable to obtain sufficient appropriate evidence to form an opinion on the financial statement.

On 25 April 2019, it was reported, the TH Heavy Engineering Bhd’s external auditor Deloitte, has issued a disclaimer of opinion on the group financial statements (for the financial year ended on 31 December 2018). In the auditor report it was noted that there are material uncertainties that may cast significant doubt on the ability of the group and of the company to continue as going concerns.

The auditor may have to issue an adverse opinion, which the auditor believes that the financial statement do not give a true and fair view in accordance with approved accounting standard. In this case, the non-compliance with the accounting standards is so significant that it affects the overall financial statements.

On 29 October 2018, it was reported, the iDimension Consolidated Bhd’s external auditor, BDO, has expressed an adverse opinion on its financial statements for the six-month financial period ended 30 June 2018.

As reported, BDO had disagreed with the decision made by iDimension’s board to treat its subsidiary, IDB Interactive Sdn Bhd as a pure investment as opposed to a subsidiary to be consolidated, which is in accordance with the law and financial reporting standards. Effectively, due to this treatment, iDimension become incapable to access to IDB’s accounting and other records in order to verify the accuracy of the financial information of IDB for the financial period.

The shareholders, as well as the stakeholders, may take appropriate action against the management, with the availability of the audit opinion.

Note: This article also published at LinkedIn.

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