The 4 Audit Opinion Types

Audit Reporting: The 4 Audit Opinion Types

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Audit & Assurance

In an audit report, an auditor presents the results of the audit with his findings and opinion. It seems simple, but audit reports can be quite complex. There are some facts necessary for audit is not accessible, and some information is quote subjective. Also, there are also various types of audit reports and opinions that an auditor can issue.

When appropriately implemented, the audit report may give the board members, the audit committee and the investors a deep insight into an organisation’s financial performance. While they provide, auditors comment on a company’s financial reporting and avail opportunities for improvement. To help companies understand what to expect from their next audit, this article will explain:

A brief Overview of an Audit Report

The audit report is an instrument through which an auditor communicates their view on an organization’s financial results and their compliance with reporting of financial results. Auditors are required to follow the specification given in the Generally Accepted Auditing Standards (GAAS) template with some exceptions depending on the nature of the audit.

That notwithstanding, audit reports will most of the times have a section where the auditor’s role, management’s role, the scope of the audit, and the audit opinion are explained.

What is the aim of an audit report?

The audit report is made to express a comment on a company’s financial condition as it regards financial reporting. The annual audits guarantee transparency in the reporting of the corporation’s financial statements, thus moving a step towards establishing good relationships between the companies, their investors, and the public.

The audit report lets you make an overview of a company’s financial performance in the reported fiscal year as well as the way it meets regulatory requirements e.g. Generally Accepted Accounting Principles.

Investors use auditor reports as a reference and make their major investment decisions based on the information in those reports. Regulators will also go through audit reports to impose penalties if there is a non-compliance.

When do auditors conduct their reports?

Prior the audit, the management discloses the financial information of the entity to the audit committee. During the yearly audit, the auditor checks the processes and procedures that the company used in preparation for the financial data. Auditors will write audit reports, which will include double-checking whether the company has used GAAP or other reporting frameworks.

The 5C’s of audit reporting

Auditors’ opinion varies from one audit report to another but in most cases, an audit report will comprise of an auditor’s opinion on the 5C’s of audit report writing.These are:

  1. Condition: What is the item that is being reviewed?
  2. Criteria: What did the organization attain / fall short of? It may start from an inaccurate statement to technical violations.
  3. Cause: What may cause the issue to happen?
  4. Consequence: What is the implication of the auditor’s report?
  5. Corrective action: The organization needs to work out what could have triggered such behavior and develop strategies to prevent its recurrence.

What does an audit report consist of?

Generally speaking, most audit reports have seven main parts, one of which is the auditor’s signature and the other being their recommendations to the audited company. These components are:

  1. Report title: The title should be clear and straightforward and auditor independence should also be clearly indicated in the audit report.
  2. Introduction: Usually this section consists of a short paragraph to mention the company name and timeline of the audit.
  3. Scope: This subsection which is a paragraph provides the scope of the auditor’s review.
  4. Executive summary: Brief summary of the audit results and the auditor’s opinion.
  5. Opinion: After the executive summmary, more details on the auditor’s opinion and how it relates with the organization.
  6. Auditor’s name and signature: The auditor will close the report by signing and writing off with his or her name.

What does an audit opinion entail?

Audit opinion is a part of the audit report reflecting the results from the audit.

The Audit Opinion has a foundation of several different factors. The audit opinion depends on many factors. For example:

  • To what extent was the data available to them.
  • Are they were able to follow all due procudres.
  • The level of materiality

Each of the factors is subjective, and its determination is dependent on the auditor’s analysis.

Audit opinion can be negative which damages company’s reputation. In some cases, adverse audit opinions may lead to litigations. Regulatory bodies will also assess the audit opinion and the audit report as they do so to confirm the information for accuracy and the impact on the taxation matters.

The 4 Audit Opinion Types

Auditors are allowed to choose between four distinct types of auditor opinion reports. Auditor opinion report is a letter issued by auditors with their comments on the statutory audit report. The four audit opinion types are:

OpinionType of audit report
UnqualifiedClean report
QualifiedQualified report
Disclaimer of opinionDisclaimer report
AdverseAdverse audit report

Unqualified opinion – clean report

An unqualified opinion suggests a clean audit report. This is the usual report Auditors give. It is also the reporting type that most companies look forward to.

If a qualified opinion does not have any adverse remarks and does not contain any disclaimers regarding any clauses or the audit process, it becomes simply unqualified opinion.

Why an auditor issues an unqualified opinion

This is a sign that the auditors are contented with the quality of the financial reporting by the company. The auditor believes that the firm’s operations conform to established governance principles and the relevant legislation. This report is perceived by the company, the auditors, the investors and the general public to be without any material misstatements.

Unmodified opinion

The unmodified opinion is exactly the same as the unqualified opinion, but the real difference is in context. For publicly listed companies, clean audit reports have an unqualified opinion, while the same reports for private companies are called unmodified.

Qualified opinion – qualified report

If the auditor has a qualified opinion, his report becomes a qualified report. It is the auditor’s way of saying that he or she isn’t certain of a specific activity or transaction, as a result of which, they cannot issue an unmodified, or clean report. Investors do not prefer qualified opinions, as it points toward a negative opinion about the company financial status.

Auditors write up qualified opinions in much the same way as unqualified opinions with the difference being that the latter state the reasons they can’t attest to unqualified opinions.

Why an auditor provides a qualified opinion

An auditor can give a qualified opinion and a qualified report if they cannot clearly confirm the financial statements of an organization or the reporting practices of an organization. The most frequent case for auditors achieve a qualified opinion is that the company didn’t do its accounting records under GAAP.

Disclaimer of opinion – disclaimer report

A disclaimer report is resulted from a disclaimer of opinion. The auditor issues the disclaimer of opinion report and this means that they do not want to be associated with providing any opinion related to the financial statements.

Generally, people feel that a disclaimer of opinion means a person is very hard-hitting. Due to that, an unfavorable impression about the company is formed.

Why an auditor provides a disclaimer of opinion

Among the reasons that auditors may be reserved in their opinion are that they had the impression that the company was limiting the scope of their audit or they didn’t get sufficient explanations for their questions. They were not in a position to interpret the intention of certain transactions and so too they did not have enough evidence to support good financial reporting.

When auditors are not allowed to witness the operation of a company nor are they able to review the certain procedures, they will probably say they cannot issue a definite opinion, so, they feel they need to state a disclaimer.

Adverse opinion – adverse audit report

The last audit opinion is an adverse opinion. An adverse finding is the auditor’s red flag. An Audit Report of an adverse nature indicates that there are substantial misstatements and there also exists the potential for fraud in the financial reports.

Why an auditor provides an adverse opinion

Auditors who consider that the financial statements are totally unsatisfying or that the level of material misstatements or irregularities is at high level in which the investors and the government will not trust the financial reports of the company.

Adverse opinions are a signal of imminent danger, of improper preparation of records according to GAAP. Financial institutions and investors normally respond to this opinion with a firm ‘No’ and will not do any kind of transactions with the enterprise.

Acquiring a favorable audit opinion

Auditors reach their independent conclusions by exercising professional judgments and obtaining legal opinions. To satisfy auditors’ keen eye and earn an unqualified opinion, it’s vital that companies:

  1. Implement internal controls: The internal controls, in turn, not only improve financial reporting but also of financial performance is more defensible in front of the auditors.
  2. Create strong financial policies: It is better to build an organised financial reporting process than it is to repair a process which has got embedded faults in it. Set and implement rules taking GAAP into consideration.
  3. Conduct regular reviews: Financial controls and policies should be scrutinized by the internal audit team on a regular basis to ensure everything is in check before the main audit takes place.
  4. Utilize software solutions: Financial reporting systems can be supported by board management software to facilitate accountability and transparency of financial reporting; this helps to get the company the best auditor opinion letter. On the other side, audit management is supported by an audit management solution to enable the company to make sure they are well positioned to get an unqualified opinion in their auditor reports. It boosts efficiency across the audit cycle and by having best practice packaged in and a solution that grows with you.

How FastLane Group Can Help?

FastLane Group offers your company expertise and unique solutions to help ensure that you are properly prepared for the upcoming audit. Our proficiency to implement internal controls and financial policies as well as to do regular reviews can be the basis for your financial reporting to be in compliance with GAAP and other regulatory standards. It will result in a positive audit opinion. Contact us now.