What is a disclaimer of opinion?
ISA 705.9 sets the condition: the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects of undetected misstatements could be both material and pervasive. The auditor does not know whether the statements are misstated. The auditor is unable to determine either way, and the uncertainty is too large to accept.
ISA 705.10 adds a specific requirement that changes the structure of the entire audit report. When issuing a disclaimer, the auditor must not include a Key Audit Matters section, must state in the Basis for Disclaimer paragraph that the auditor was unable to obtain sufficient appropriate evidence, and must not describe matters that would otherwise have been key audit matters.
In practice, disclaimers are the rarest form of modification. They tend to arise in specific circumstances: the client restricts access to records after the engagement has started, a catastrophic event destroys accounting records mid-audit, management refuses to provide representations required by ISA 580, or the entity's accounting system is so deficient that no reliable evidence exists for the majority of balances.
Key Points
- A disclaimer means the auditor could not complete enough work to form any opinion at all.
- It applies only when the scope limitation is both material and pervasive to the financial statements.
- A disclaimer report must not include a key audit matters section, since the auditor cannot form an opinion.
- If the limitation is material but confined to specific elements, a qualified opinion applies instead.
Why it matters in practice
The most significant error is issuing a disclaimer when a qualified opinion would have been sufficient. ISA 705.9 requires the possible effects to be pervasive, not just material. If the scope limitation affects only one balance sheet line and alternative procedures can partially address the gap, the limitation may be material but not pervasive. A qualified opinion under ISA 705.7(b) would apply in that case.
A second issue involves the report structure. ISA 705.10 prohibits inclusion of Key Audit Matters in a disclaimer report. Teams that use template-based report generation occasionally fail to remove the KAM section, producing a report that technically violates the standard.
Worked example: Meridian Software Ltd
Client: Irish SaaS company, FY2024, revenue €19M, IFRS reporter.
Six weeks into fieldwork, the client's sole accounting system suffers a ransomware attack. The backup restores only data through September 2024. Three months of transaction-level data (October through December) are unrecoverable. Q4 represents approximately 32% of annual revenue.
Determine the nature: The team cannot access transaction data for October through December 2024. Bank statements exist and confirm cash movements, but the underlying accounting records that support revenue recognition, accruals, prepayments, year-end cut-off, and expense classification are unrecoverable.
Assess materiality: The unauditable period covers an estimated €6.1M of revenue (32% of the annual total). Overall materiality is €570K. The potential effect vastly exceeds materiality.
Assess pervasiveness: The data loss affects revenue recognition for Q4, related trade receivables at year-end, accrued expenses, deferred revenue, and the classification of cash flows. Under ISA 705.5(a), the effects are not confined to specific elements and represent a substantial proportion of the financial statements. The possible effects are pervasive.
Issue the disclaimer: The engagement partner issues a disclaimer of opinion under ISA 705.9. The Key Audit Matters section is omitted per ISA 705.10.
Disclaimer vs adverse opinion
A disclaimer and an adverse opinion are both severe, but they address different situations. An adverse opinion means the auditor has enough evidence to conclude that the statements are wrong. A disclaimer means the auditor does not have enough evidence to form any conclusion at all. One is a negative answer. The other is no answer.
The distinction matters for governance. With an adverse opinion, management knows exactly what the auditor considers misstated and can correct it. With a disclaimer, the path forward is less clear. The board needs to understand why the evidence was unavailable and what must change before the next audit can proceed.
Key standard references
- ISA 705.9: Condition for a disclaimer — inability to obtain evidence where possible effects are material and pervasive.
- ISA 705.10: Report structure changes — no KAM section, no reference to matters that would otherwise be KAMs.
- ISA 705.5(a): Definition of pervasiveness.
- ISA 705.30: Requirement to communicate with those charged with governance when a modification is expected.
Related terms
Related reading
Frequently asked questions
Does a disclaimer report include Key Audit Matters?
No. ISA 705.10 prohibits the inclusion of a KAM section in a disclaimer report. If you cannot form an opinion, you cannot simultaneously communicate what the most significant audit matters were.
What is the difference between a disclaimer and an adverse opinion?
An adverse opinion means the auditor has evidence and concluded the statements are wrong. A disclaimer means the auditor could not obtain enough evidence to form any conclusion at all.