c) A disclaimer of opinion is issued when there is a limitation in the scope of the audit or an inherent uncertainty that is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and accordingly is unable to express an opinion.
A limitation in the scope of the auditors work may be caused by: –
The entity e.g. when his engagement terms specify that he will not carry out what he believes to be necessary.
Circumstances e.g. where the appointment of the auditor is after stock taking and therefore the auditor is unable to observe the exercise.
Inability to carry out audit procedures believed to be desirable.
A disclaimer of opinion could be issued when the accounting records of a client are destroyed by fire or become corrupted (when held on soft copy) making it difficult to obtain the required information or where management refuses to give the auditor information on an issue that is fundamental to the financial statements.
This is expressed when the effect of a disagreement is so material and that a qualification of reports is not adequate to disclose the misstatement or incompleteness of financial statements.
Auditors may disagree with management regarding: –
The acceptability of accounting policies selected
Methods of application of accounting policies
Adequacy of financial statement disclosures.
An example when an adverse opinion is required is when the management refuses to make a provision for a contingent liability whose crystallisation appears imminent or write off a bad debt.