Generally, audited financial statements are required by most of the location regulators, shareholders, banks, creditors, and other related stakeholders. The auditors who could perform the audit on the financial statements should have enough experience and have the licenses obtained from the local regulators where audit firms are operating.
After the audit works finish, the auditor will issue its opinions based on the evidence that is obtained. The opinion letter will be attached to the audited financial statements and board of director reports. In general, the audit options are including unqualified, qualified, adverse, and disclaimer options.
Auditor’s opinion forms part of the audit report and is a very critical part literally the crux of the audit report. The audit opinion letters are based on an audit of procedures and records used to produce the financial statements.
The auditor then provides an opinion as to if the financial statement is free from material misstatement. The audit report starts with the introduction part comprising the responsibility of both the management and the auditors.
The next part identifies the financial statements on which the auditor has to provide an opinion. The third part is the section that depicts the opinion of auditors on financial statements.
Further, if the third part is elaborated, the qualified or adverse opinion may form part of the report. The use of audit reports is made by the law if the company is in a listed space or if the company operates in an industry that is highly regulated by the SEC.
Further, companies that seek to improve internal controls might get their book audited.
The opinion ranges from unqualified opinion, qualified opinion, or adverse opinion for audits in the United States.
The audit in the US is done in accordance with generally accepted accounting principles (GAAP). The audit is performed with integrity and independence by Certified Public Accountants (CPAs) in the country.
Now, we will dive deep into the various audit opinions that auditors can give even disclaimers of opinion in certain scenarios.
1) Unqualified Opinion
An unqualified opinion means that auditors could not find any significant violations or mismanagement in the financial statements of the company.
In other words, such a report is also called a clean opinion letter representing financial statements of the highest compliance with regulations and laws. The audit report may include a brief summary of the process of the audit and what sort of information was reviewed.
Unqualified opinions are the most desired opinion from the auditors by the management. The auditor here states that the financial position and operations of the company are true and fairly represented in the financial statements.
The unqualified opinion contains a title that includes ‘independent’. This is used to show that the audit report was done by an unbiased third party.
2) Qualified Opinion
Qualified opinion depicts that the auditor has found some issues in the financial statements of the company.
This means the auditor has not issued a clean opinion letter but rather an opinion with some remarks or doubts about the financial statements. Qualified opinions have two sets of qualifications.
One would be the deviation from GAAP which means the financial statements are not in compliance with GAAP and it does not conform to standard accounting principles.
Another qualification would be the limitation of scope. This is a case where auditors cannot review one or more aspects of financial statements due to the limitations imposed by the management.
This qualification is basically on those matters of financial statements that could not be reviewed by the auditors.
3) Adverse Opinion
An adverse opinion is basically a negative audit opinion by the auditor. It indicates that the auditor has found significant material misstatements in the financial statements.
These misstatements are material and mean financial statements. This means the financial statements are not reliable or the wrong information conclusion is therein. Banks and public financial institutions avoid companies with adverse audit opinions.
Such financial statements with flaws however do not represent the true representation of health of the organization.
When such an audit opinion letter is issued, the company must correct its financial statements immediately. The company shall issue re-audited financial statements. Investors, lenders, and other stakeholders are interested in well-complied financial statements.
4) Disclaimer of Opinion
This is the worst kind of audit opinion the company can receive. Auditors issue a disclaimer of opinion to state that they cannot form an opinion regarding the financial statement of the company.
Auditors can also provide a disclaimer of opinion if they refuse to issue an opinion on the financial statements of the company.
The situation of a disclaimer of opinion arises when the auditor is not able to exercise independence. This occurs when the auditor provides other services in addition to the audit.
This can restrict auditors from providing clear and concise opinions on financial statements as a third party. Further, a disclaimer of opinion is opined when the auditor is unable to review the financial information of the company in its entirety leading to significant limitation of audit scope.
The auditor can also provide a disclaimer of opinion to those companies where there is the possibility of bankruptcy in the near future.
Basically, due to a variety of reasons, the auditor cannot provide an opinion due to the absence of appropriate financial records. When such scenarios occur, the auditor disclaims the opinion stating the status of financial statements cannot be ascertained properly.