June 10, 2022 June 10, 2022/ Steven Bragg
An auditor’s opinion is a formal statement made by an auditor concerning a client’s financial statements. There are several types of audit opinions, which are noted below.
Unqualified Opinion
The unqualified opinion states that the financial statements fairly reflect the client’s financial results and financial position. This is the gold standard opinion that clients seek, since it provides a seal of approval to the client’s financial statements, making it easier to raise money from lenders and investors.
Qualified Opinion
The qualified opinion indicates any limitations on the scope of the audit and may describe certain information that could not be verified.
Adverse Opinion
The adverse opinion indicates significant problems with the client’s financial statements.
Disclaimer
Another possible outcome is the disclaimer, where the auditor states that no opinion can be given regarding the financial statements due to such factors as the absence of financial records or a lack of cooperation by the client’s management team.
June 10, 2022/ Steven Bragg/
A qualified opinion is a statement issued in an auditor's report that accompanies a company's audited financial statements. It is an auditor's opinion that suggests the financial information provided by a company was limited in scope or there was a material issue with regard to the application of generally accepted accounting principles (GAAP)—but one that is not pervasive.
Qualified opinions may also be issued if a company has inadequate disclosures in the footnotes to the financial statements.
- A qualified opinion is one of four possible auditor's opinions on a company's financial statement.
- The other auditor's opinions are unqualified, adverse, or a disclaimer of opinion.
- A qualified opinion indicates that there was either a scope limitation, an issue discovered in the audit of the financials that were not pervasive, or an inadequate footnote disclosure.
- A qualified opinion is an auditor's opinion that the financials are fairly presented, with the exception of a specified area.
- Unlike an adverse or disclaimer of opinion, a qualified opinion is generally still acceptable to lenders, creditors, and investors.
- The auditor's opinion is usually found in the third and final section of an auditor’s report.
A qualified opinion may be given when a company’s financial records have not followed GAAP in all financial transactions, but only if the deviation from GAAP is not pervasive. The term "pervasive" can be interpreted differently based on an auditor's professional judgment. However, to not be pervasive, the misstatement must not misrepresent the factual financial position of the company as a whole and should not have an effect on the decision-making of financial statement users.
A qualified opinion may also be given due to a limitation of scope in which the auditor was not able to gather sufficient evidence to support various aspects of the financial statements. Without sufficient verification of transactions, an unqualified opinion may not be given. Inadequate disclosures in the notes to the financial statements, estimation uncertainty, or the lack of a statement of cash flows are also grounds for a qualified opinion.
A qualified opinion is listed in the third and final section of an auditor’s report. The first section of the report outlines management’s responsibilities in regards to preparing the financial statements and maintaining internal controls. The second section outlines the auditor’s responsibilities. In the third section, an opinion is given by the independent auditor regarding the company’s internal controls and accounting records. The opinion may be unqualified, qualified, adverse, or a disclaimer of opinion.
A qualified opinion states that the financial statements of a corporate client are, with the exception of a specified area, fairly presented. Auditors typically qualify the auditor's report with a statement such as "except for the following," when they have insufficient information to verify certain aspects of the transactions and reports being audited.
A qualified opinion is not so severe that it indicates that a business is doing poorly or that a company has hidden or falsified information, but rather, that the auditor simply cannot give an issue free report. The auditor may specify that they believe the overall audit to be true and factual but will specify the area that they believe is the issue.
A qualified opinion is a reflection of the auditor’s inability to give an unqualified, or clean, audit opinion. An unqualified opinion is issued if the financial statements are presumed to be free from material misstatements. It is the most common type of auditor's opinion.
If the issues discovered during the audit result in material misstatements that would affect the decision making of the financial statement users, the opinion is escalated to an adverse opinion. The adverse opinion results in the company needing to restate and complete another audit of its financial statements. A qualified opinion is still acceptable to most lenders, creditors, and investors.
In the event that the auditor is unable to complete the audit report due to the absence of financial records or insufficient cooperation from management, the auditor issues a disclaimer of opinion. This is an indication that no opinion over the financial statements was able to be determined.
Understanding Reservations in an Independent Auditor’s Report
There are two types of reservations:
1. GAAP departure
Situations where the financial statements deviate from the established accounting criteria. For example, a company that uses an incorrect accounting method faces a GAAP departure.
2. Scope limitation
Situations where the auditor is unable to obtain sufficient appropriate audit evidence to base the audit on. This presents a scope limitation.
In addition, the type of opinion, based on the reservation made, depends on two factors:
1. Materiality
Misstatements to the financial statements are considered material if the misstatements (individually or in aggregate), are expected to influence the decisions made by users who rely on the financial statements.
2. Pervasiveness
Misstatements to the financial statements are considered pervasive if the misstatements affect a substantial portion of the financial statements.
What is a Qualified Opinion?
A qualified opinion can be issued due to a GAAP departure or a scope limitation. In both cases, the misstatements are material but not pervasive. In other words, there is a material impact on the financial statements, but the misstatements are not widespread (do not affect a large number of accounts).
Example 1: Qualified opinion due to a GAAP departure
The auditor noticed that the inventory of ABC Company faces a write-down due to obsolescence. However, the company refuses to write down the inventory. In such a scenario, a GAAP departure reservation is made. Since only the inventory and cost of goods sold accounts are wrong, a qualified opinion due to a GAAP departure would be issued.
Example 2: Qualified opinion due to a scope limitation
The auditor wants to send out confirmation letters to customers for the accounts receivable balance as audit evidence. However, ABC Company does not want the auditor to do so. In such a scenario, a scope limitation reservation is made. Since the auditor has been unable to verify the accounts receivable, a qualified opinion due to a scope limitation would be issued.
What is an Adverse Opinion?
An adverse opinion can only be issued due to a GAAP departure. In such a case, the misstatements are both material and pervasive. In other words, there is a material impact on the financial statements, and the misstatements affect a large number of accounts.
Example: Adverse opinion due to a GAAP departure
The auditor believes ABC Company faces a going concern issue and is unable to survive another year. The company disagrees and prepares its financial statements on a historical cost basis instead of on a liquidation basis. In such a scenario, a GAAP departure reservation is made. Since ABC Company prepared its financial statements on a historical cost basis, the majority of the company’s accounts are incorrect. An adverse opinion due to a GAAP departure would be issued.
What is a Disclaimer of Opinion?
A disclaimer of opinion can only be issued due to a scope limitation. In this case, the misstatements are material and pervasive. In other words, the auditor is unable to collect sufficient appropriate audit evidence to base its audit on and, as a result, a large number of accounts are not verifiable.
Example: Disclaimer of opinion due to a scope limitation
The auditor is looking to review the company’s minutes book, which contains important information regarding the board of directors meeting and the audit committee. ABC Company does not permit the auditor to review the minutes book. In such a scenario, a disclaimer of opinion reservation is made. Since the auditor is unable to access the minutes book, a majority of the company’s accounts cannot be verified. A disclaimer of opinion due to a scope limitation would be issued.
Related Readings
Thank you for reading CFI’s guide to Auditor Opinions. To keep learning and advancing your career, the following CFI resources will be helpful: