A disclaimer of opinion is an auditor’s report that states the auditor does not express an opinion on the financial statements (PCAOB, AS 3105, paragraph .01). It is not a bad opinion. It is the absence of one, issued when the auditor cannot gather enough evidence to support any conclusion about the statements taken as a whole.
That distinction changes what the document looks like. A disclaimer report is shaped by subtraction: several sections a clean report carries are required to be left out, and the sections that remain say what the auditor was engaged to do and why the work could not support an opinion. What follows is what those sections have to contain.
When an Auditor Disclaims
A disclaimer follows a limitation on the evidence rather than a disagreement about the accounting. An auditor may decline to express an opinion whenever unable to form, or having not formed, an opinion on the fairness of the presentation (PCAOB, AS 3105, paragraph .44). Where the evidence is short, the choice is between a qualified opinion and a disclaimer, and the standard frames it from the other side: a qualified opinion is the outcome where the auditor has concluded not to disclaim (PCAOB, AS 3105, paragraph .02). The boundary between the two is set out in qualified opinion in auditing.
The other direction is closed off explicitly. An opinion should not be disclaimed because the auditor believes the statements contain material departures from generally accepted accounting principles (PCAOB, AS 3105, paragraph .45). A disagreement the auditor can measure produces a qualified or an adverse opinion, not silence. The four-outcome grid this sits inside, and the definition of pervasive that separates its members, are set out in audited report.
What the Report Must Contain
The structure is prescribed. When the auditor disclaims an opinion, the report must include the basic elements required of an unqualified report under AS 3101, modified so that the first section is titled “Disclaimer of Opinion on the Financial Statements” and the second is titled “Basis for Disclaimer of Opinion” (PCAOB, AS 3105, paragraph .46).
Report of Independent Registered Public Accounting Firm
Addressee
Disclaimer of Opinion on the Financial Statements
the name of the company whose statements the auditor was engaged to audit
a statement identifying each financial statement and related schedule
the reason no opinion is expressed, and the statement that none is
Basis for Disclaimer of Opinion
management's responsibility for the financial statements
the auditor's registration with the PCAOB and independence requirements
Signature of the firm
How long the firm has served as the company's auditor
City and state
DateThe first section carries two identification elements the standard names directly: the name of the company whose financial statements the auditor was engaged to audit, and a statement identifying each financial statement and any related schedules (PCAOB, AS 3105, paragraph .46). Note the tense. The auditor was engaged to audit them, rather than audited them, and the wording is deliberate.
The Sentence That Does the Work
Everything else in the report supports one operative statement, and the standard requires both halves of it.
If the auditor disclaims an opinion, the report should give all of the substantive reasons for the disclaimer (PCAOB, AS 3105, paragraph .44). Where the disclaimer follows a scope limitation, the auditor should set out those reasons in a separate paragraph or paragraphs and should state that the scope of the audit was not sufficient to warrant the expression of an opinion (PCAOB, AS 3105, paragraph .45). Substantive reasons is the load-bearing phrase. A one-line disclaimer that names no specific evidence failure does not meet it.
The standard’s own illustration shows how the two halves join. It describes a company that did not take physical inventories and whose records did not permit other auditing procedures to be applied to inventories or property and equipment, and it concludes that the auditor was not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion and does not express an opinion on the financial statements (PCAOB, AS 3105, paragraph .47). Fact, consequence, conclusion, in that order.
What a Disclaimer Report Leaves Out, on Purpose
This is where the report departs most from a clean one.
The auditor should not identify the procedures that were performed, and should not include the paragraph describing the characteristics of an audit, the scope paragraph of the standard report, because doing so may tend to overshadow the disclaimer (PCAOB, AS 3105, paragraph .45). Listing the work done reads as reassurance, and reassurance is exactly what the report is not offering.
Two further omissions are specified.
Two further omissions are specified. Several of the standard elements of an unqualified report under AS 3101 are omitted, and the requirements on communicating critical audit matters do not apply when the auditor disclaims an opinion (PCAOB, AS 3105, paragraph .46).
The auditor should also disclose any other reservations held about fair presentation in conformity with generally accepted accounting principles (PCAOB, AS 3105, paragraph .45). Disclaiming does not discharge what the auditor already knows.
No Piecemeal Opinions
The temptation, once no overall opinion is possible, is to give an opinion on the parts that were verified. The standard forbids it. Piecemeal opinions, meaning expressions of opinion on certain identified items in the financial statements, are not to be expressed where the auditor has disclaimed an opinion or expressed an adverse one, because they tend to overshadow or contradict the disclaimer (PCAOB, AS 3105, paragraph .48).
The parts that were auditable are often the parts a client most wants confirmed, and paragraph .48 forecloses saying so.
Common Questions
No, and they come from opposite problems. An adverse opinion states that the financial statements do not present fairly, which is a conclusion the auditor reached on the basis of the audit. A disclaimer states that the auditor does not express an opinion, which means no conclusion was reachable (PCAOB, AS 3105, paragraph .01). One says the numbers are wrong. The other says nobody can tell from here.
Practically, the statements arrive with no opinion attached, so a covenant or grant condition written against an unqualified or unmodified opinion is not met. The substantive reasons paragraph is the part worth reading, because it names the specific evidence failure that produced the outcome.
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