A disclaimer of opinion is issued by the auditor when the possible effect of a limitation of scope on his work or of an uncertainty is so significant that the auditor is unable to express an opinion on the financial statements.
For instance, the Income Tax authorities seize the books of account of a company. Under such circumstances, the auditor is unable to conduct an audit of the same. A situation may also arise when an auditor is not permitted to verify inventory at location outside the city is which the company’s office is located. In such situation the auditor may state that he is unable to express an opinion because he has not been able to obtain sufficient audit evidence to form an opinion.
An adverse opinion is one where the auditor states that the accounting statements do not show a true and fair view of state of affairs or of the operating results. Such an opinion is issued when the effect of disagreement is so material and pervasive to financial statements that the auditor concludes that a qualification of his report is not adequate to disclose the misleading or incomplete picture of the financial statements. This conclusion can be reached by the auditor in an extreme case when there had been flagrant violation of the accounting principles or evidence is not available for material transactions or within the knowledge of the auditor there exists material concealment or misstatement about financial affairs