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What To Look For in an Audit Opinion 
 
by kmhagen July 18, 2005

The audit opinion is the statement that appears at the end of the financial statements, in which the independent auditors express whether, based on their audit, the financial statements fairly present the company’s financial position and the results of its operations for the period reported.  While the audit opinion conforms to standardized wording, and is generally very similar for all publicly reported companies, there are different opinions that can be expressed.

Material Misstatements

First, the audit opinion will identify the reporting entity, the financial statements presented, and the period(s) covered by the statements.  The opinion also normally makes reference to the fact that the financial statements are the responsibility of management, meaning that the auditors did not prepare the statements – they performed an audit and are giving their opinion on the fairness of the statements.  This is generally interpreted to mean whether the financial statements are free of “material misstatements” that could affect the reader’s reliance on the information presented in the statements.

Auditing Standards

The opinion will make reference to the applicable auditing standards that applied, the most common of which would be generally accepted auditing standards in the United States or another country, or international auditing standards.  This part of the opinion will go on to briefly describe what those standards require, including obtaining “reasonable assurance”, examining evidence “on a test basis”, “assessing the accounting principles used and significant estimates made by management”, and “evaluating the overall statement presentation”. The auditors will then express that they believe their audits “provide a reasonable basis” for their opinion.

Opinion

There are basically four types of audit opinions that can be expressed, with a variation on the first, when applicable:

  1. Unqualified
    1. Unqualified with additional explanatory text
  2. Qualified
  3. Adverse
  4. Disclaimer

Unqualified Opinion

An unqualified, or “clean” opinion means that the financial statements are fairly presented in the auditors’ opinion, are free of material misstatements, and have been prepared in accordance with generally accepted accounting principles, consistently applied.  If the statements have been prepared on a basis other than generally accepted accounting principles (GAAP), the opinion should indicate this basis.  This could be the case for financial statements that are prepared to meet a specific governmental, regulatory, or other requirement.

If the auditors feel it is necessary to include additional explanatory information in the body of the opinion itself, they will generally include a separate paragraph summarizing this disclosure.  Provided they still issue an unqualified opinion, this additional explanation is for purposes of greater clarity and does not detract from the unqualified opinion as to the fairness of the financial statements.

Qualified Opinion

A qualified opinion will include an “except for” clause or similar wording to express that the auditors have taken exception to a certain accounting application or treatment, or were unable to establish the potential outcome of an uncertainty, which could have a material effect on the financial statements.  A qualified opinion will include a separate paragraph explaining the reason for the qualification.  This type of opinion is intended to call attention to a certain issue, that prevented the auditors from issuing a clean opinion.

Adverse Opinion

In an adverse opinion, the auditors are clearing stating their opinion that the financial statements are not fairly presented in accordance with the accounting and reporting principles intended, or that there are material misstatements.  There will be a paragraph explaining the reason for their negative opinion.

Disclaimer

A disclaimer indicates that the auditors were engaged to perform an audit, but are unable to express an opinion.  This may be due to a lack of independence on the auditors’ part; limitations on the scope of the audit, for example, the inability to obtain sufficient evidence; or may be due to substantial doubts about the entity as a “going concern”, or material uncertainties for which the auditors were unable to obtain reasonable assurance about the outcome.

Summary

In practice, issues that could result in misstatements are often cleared up between the auditors and management before the financial statements are published, with any appropriate adjustments being made.  And while an audit opinion is not intended to be a certification of the financial statements, it represents an important part of the overall presentation.


 




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