Updated: May 8
In 2020, AirAsia Group Bhd’s external auditor issued an unqualified audit opinion on the material uncertainty relating to the group’s going concern in view of the current economic condition and the Covid-19 pandemic.
The unqualified audit opinion states that the financial statements of AirAsia for the financial year ended 31 December 2019 are true and fair and in compliance with financial reporting standards and statutory requirements in all material aspects.
"These events or conditions indicate the existence of material uncertainties that may cast significant doubt on the group's and the company’s ability to continue as a going concern," said Ernst & Young (the auditors said).
As an investor, you might be wondering what is above all about.
Purpose of a financial statement audit
A financial statement audit is an objective examination and evaluation of a company's financial statements by an independent auditor to ensure that they represent the transactions fairly and accurately.
The purpose of this audit is to provide assurance to the stakeholders, including investors and shareholders, that the financial statements are reliable and can be used to make informed economic decisions. The auditor will issue its opinion on the financial statements after completing the audit.
Audit opinions play a crucial role in maintaining the integrity and transparency of the financial statements of listed companies.
Investors and stakeholders rely on audit opinions to evaluate a company's financial health and make informed investment decisions.
Types of Audit Opinions
Auditors issue two types of audit opinions:
A clean opinion (unmodified/unqualified opinions) means that the financial statements are free from material misstatements and accurately reflect the company's financial position, results of operations, and cash flows.
In contrast, a modified opinion means that the financial statements are materially misstated, either due to a limitation in the scope of the audit or due to a disagreement with management on accounting principles or disclosures.
There are several types of modified opinions, including:
A qualified opinion is issued when the financial statements are materially misstated but not to the extent that they are considered to be misleading as a whole.
The auditor may not have obtained sufficient evidence, or there may be a disagreement with management on accounting principles or disclosures.
An adverse opinion is issued when the financial statements are materially misstated and are considered to be misleading as a whole.
This opinion indicates that the financial statements are not in compliance with the applicable financial reporting framework and that the auditor has significant reservations about the company's financial health.
Disclaimer of Opinion
A disclaimer of opinion is issued when the auditor is unable to obtain sufficient evidence to form an opinion on the financial statements. This may occur when there is a limitation on the scope of the audit, such as the inability to obtain access to certain documents or information.
The Emphasis of Matter Paragraphs
Auditors can also modify the audit report without modifying the opinion by adding additional paragraphs to draw users’ attention to specific significant matters.
For example, if the auditors believe that some aspect of the financial statements is subject to a material degree of uncertainty—even if fully disclosed—then they may draw attention to and emphasise this in the audit report.
This is widely known as an emphasis of matter paragraph.
The EOM paragraph explains the matter being emphasised and references where relevant disclosures can be found.
In summary, the audit opinion reflects the auditor's conclusion regarding the fairness of the financial statements, while the EOM paragraph enhances the understanding of the users of the financial statements.
Both elements provide transparency and clarity to the financial reporting process.
When auditors cannot express an opinion or issue a disclaimer of opinion, it may suggest that the financial statements lack reliability.
Investors should avoid companies with such audit opinions.
However, if investors have a keen interest in a particular company and such audit opinions have been issued in previous years, it is recommended that they scrutinise the evolution of audit opinion types over the last few years and assess whether there have been instances of auditors with better reputations replacing previous ones in the company's history. This exercise can illuminate investors' decision-making process.
It is worth noting that the importance of auditing in the evolving financial reporting landscape has not diminished during the COVID-19 pandemic. It has only underscored the need for auditors to adapt to changing stakeholder demands.