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Types of Independent Audit Reports and Opinions
An independent audit report is a document companies receive at the end of a financial audit. The primary purpose of an audit is to assure outside stakeholders that a company follows whatever accounting principles govern its resident country. In most cases, Generally Accepted Accounting Principles or International Financial Reporting Standards are the most common measuring stick for audits. An auditor has the option to give one of four basic audit reports to a company based upon the auditor’s review of the company’s books compared to the set of accounting principles.
An unqualified audit opinion is the best audit report a company can receive. It states that auditors have not found any material misstatements and the company follows governing accounting principles with no exceptions. Most companies receive this audit report. A company may need to undergo a remedial audit, however, to achieve this report if a prior audit contained a different opinion.
The worst audit report a company can receive is one with an adverse opinion. This one can be pretty nasty. It essentially states that a company has at least one – possibly more – areas that do not conform to GAAP or IFRS standards. The departures from GAAP or IFRS may be so severe that they heavily distort a company’s financial statements. In most cases, the audit report will contain a few paragraphs to explain the departures or other misstatements that led to the adverse opinion.
Companies may receive an audit report that falls between the first two opinions, known as a qualified audit opinion. In fact, almost all companies have probably received this opinion at one time. As an accountant for two publicly held companies – with one a Fortune 500 firm – I have seen a few of these audit report types. The qualified opinion states that a company is mostly in compliance with GAAP or IFRS. However, there is at least one issue that auditors see as an error. The error, however, does not indicate a serious problem and may not result in a material misstatement for the company’s financial statements.
A disclaimer of opinion is the final audit report type handed out during an independent audit. This audit report simply states the auditor was unable to complete normal audit procedures on a company’s books. The audit limitation results in an auditor being unable to fully consent – give an unqualified opinion – on a company’s accounting documents and financial statements. In short, this opinion does not carry a positive or negative connotation. It simply means not enough information exists for auditors to state another audit opinion.