Lately, we have often read news about different government agencies touting that they received the “highest audit rating” from the Commission on Audit (COA) by getting an unmodified audit opinion. But what exactly is a COA unmodified audit opinion? Is this really the highest COA audit rating given to government agencies? Can this be considered as a rating? When COA renders an unmodified opinion on the financial reports of an agency, does that mean that it is free of corruption?
Considering that the use of the phrase "highest COA audit rating" is prone to misinterpretations and due to its potential impact on key decision-makers and the public, COA recently stressed in a press release that an audit opinion should not be viewed as a rating, score, or grade, which may be ranked from lowest to highest. COA clarified that an audit opinion is a statement that expresses whether or not the financial statements are prepared, in all material respects, according to the applicable financial reporting framework.
An audit opinion is a certification expressed in the audit report on the auditees’ financial statements. It is an opinion that pertains to the end-result of the financial audits that are regularly conducted by state auditors on various government agencies, instrumentalities and corporations within their respective jurisdictions. It neither reflects the government office’s extent of compliance with laws, rules, and regulations that is evaluated by means of compliance audits nor the auditee’s application of the principles of economy, efficiency, and effectiveness in their operations that are assessed through performance audits, unless these have impact on the agency’s financial statements. In other words, the audit opinion is pertinent to the financial statements prepared by the auditees and is generally irrelevant to the latter’s legal and regulatory compliance as well as the quality of their operations.
The audit opinion is an imperative part of the audit report because it is made in the form of a formal statement rendered by an independent auditor concerning the presentation of the auditees’ financial statements. Before rendering an opinion, the auditor obtains reasonable assurance about whether the financial statements as a whole are free from material misstatements, and whether these are due to error or fraud. In the course of the audit, the auditors identify and assess the risk of material misstatement, design and perform risk-responsive audit procedures, and obtain sufficient and appropriate audit evidence to provide a basis for their audit opinions.
There are different types of audit opinions—unmodified or modified. Under the International Standards of Supreme Audit Institutions (ISSAIs), which are the standards being used by most of the supreme audit institutions worldwide, such as the COA, the state auditor should express an Unqualified or Unmodified Opinion if it is concluded that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. Meaning to say, an Unqualified or Unmodified Opinion means that the financial statements are free from material misstatements, which could arise from either fraud or error. This type of opinion indicates that the auditors are satisfied with the auditee’s financial reporting. This is the opinion being erroneously referred to by a number of government agencies as “highest audit rating.”
Meanwhile, according to the ISSAIs, three types of modified opinion may be issued. A Qualified or Modified Opinion is issued when the auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement. The auditor concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements. This opinion may also be issued if the auditor is unable to obtain sufficient appropriate audit evidence on which to base an opinion, but concludes that the effects on the financial statements of any undetected misstatements could be material but not pervasive.
On the other hand, the auditor should express an Adverse Opinion if, having obtained sufficient appropriate audit evidence, the auditor concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.
The auditor should express a Disclaimer of Opinion if, having been unable to obtain sufficient appropriate audit evidence on which to base the opinion, the auditor concludes that the effects on the financial statements of any undetected misstatements could be both material and pervasive.
COA wishes to emphasize that an audit opinion is expressed over the financial reporting of a government auditee which is only one of its many facets. The audit opinion is communicated so that the stakeholders which includes the public may determine whether they can reasonably rely on the financial statements prepared by auditees. To reiterate, unless these have financial impact, the legal as well as regulatory compliance and operational performance of an auditee are not covered in the conduct of a financial audit. Therefore, audit opinion, which is the result of a financial audit, may not be used to conclude that any auditee is free or not from corruption or other illegality or irregularity.
Results of these audits are found in the Annual Audit Reports and are uploaded inthe COA website (www.coa.gov.ph).
(Roland C. Pondoc is a Commissioner of Commission on Audit)