What does a clean opinion mean?
A clean opinion can be defined as an unqualified independent auditor’s report, the clean report, issue for the organization’s financial statements. This kind of report confirms that the financial statements of the company do not have any mater come from error or fraud.
The financial statements are free from material misstatement or it is clean.
In a situation where an auditor doesn’t believe that this is the case, some opinions can be issued such as a qualified opinion, adverse opinion, or disclaimer of opinion.
Communities of Investments and lenders are only willing to invest their funds into a business that has been issued a clean opinion.
What Is a Clean Opinion?
A very good example of a Clean opinion is:
A typical audit report of a clean opinion letter may state such as “from our view, the financial statements give a true and an equal view of the Financial state of the ABC company.”
The judgment of a free author about Financial statements of an organization is shown appropriately, equally concerning GAAP Generally Accepted Accounting Principles and it is called a clean opinion. The most common type of auditor’s report is a clean opinion.
So usually when an auditor understands that an organization’s financial statements are excellent and free from misstatements and errors.
So In this case, only a clean opinion can be issued.
A clean opinion is very different from a qualified opinion relating to the fact that a qualified opinion can only be issued when an auditor finds something in the organization’s financial statements that’s of big concern.
The first paragraph is referred to as the introductory paragraph, and it shows the work of the audit that is performed.
And also the roles of the auditor are established concerning the financial statements, the second paragraph is also known as scope paragraph, and it gives a detailed description of the work and on the restrictions that the auditor might pass through because of the nature of the audit.
The third paragraph is also known as the opinion paragraph and it presents the opinion of the auditor on the Financial Statements, and if the auditor followed the accounting principles.
The role of an auditor is to show the amount of accuracy and how reliable a financial statement been check by them.
Clean or Unqualified Opinion vs. Other Opinions
A clean opinion is utilized to access similarities and differences to a qualified opinion, in which the auditor has ascertained that there is a material issue which is related to accounting policies – but one that does not represent falsely the original financial position.
Auditors typically make eligible reports, with several statements eg. “except for the following adjustments,” when they have insufficient information to verify certain aspects of the transactions and reports being audited.
Qualified Opinions sometimes can be issued if the Financial statements diverts from GAAP or have inadequate disclosure, if truly the Financial statements were not represented well, the auditor will report an adverse opinion or a disclaimer of opinion.
There are four main opinions an auditor can show in terms of his value showing of Financial statements, and these include:
1. Unqualified(Clean) opinions
2. Qualified Opinions
3. DISCLAIMER GROUPS
4. Adverse Opinions
If an auditor issued a clean opinion, he declared that he has performed a careful review of the organization’s financial reports and the necessary process to come to conclusions that the Financial report that is processed reflects, to the most excellent of his judgment, and the organizations present Financial Situations.
Auditors use the standard Financial guidelines to check if the accounting procedures being used are equal is the Generally Accepted Accounting Principles (GAAP). An auditors’ compliances with these principles are very important for him to express a clean opinion.
What it means generally?
The meaning of a clean opinion generally is as follows:
- There is enough disclosure of all materials that are useful for its appropriate presentation of the Financial facts
- An organization’s financial statements have been prepared to use the Generally Accepted Accounting Principles, and it is applied simultaneously
- The organization’s financial statements are in correlation with the statutory rules, requirements, and regulations.
- In cases of changes in the accounting principles, or when there is a need for application, In this case, it has to be appropriately revised and determined in the financial statements of the organization.
The financial reports by the auditor usually contain a title, and a header, the body of the report, and the signature and the address of the auditor in charge.
And also the date the report was issued. The US auditing standards state that the title should include ‘independent’ to pass across to the user that the report was fully unbiased in every aspect.
It consists of three main paragraphs and these three paragraphs constitute the body of the clean report and each paragraph has a standard wording and it’s individual purposes.
Moreover, some auditors have made some changes to the body of some reports but not the wording so that they can differentiate themselves from other audit firms.
Clean Opinion Audit
A clean Opinion can also be known as an unqualified opinion. In this situation, the auditor reports a Clean Opinion if the financial statements are free from material misstatement, additionally, if the management has claimed responsibility of the establishment and the maintenance, a clean opinion can be given over the internal controls of the organizational entity.
And the auditor needs to perform detailed fieldwork to test its accuracy and effectiveness.
A firm’s auditor opinions about its Financial statements are that they are fairly presented with the GAAP (Generally Accepted Accounting Principles).
A clean opinion does not majorly mean that a participant firm is strong Financially or that it has a good and bright future, because weak firms nowadays receive clean opinions, which is also called the standard opinion, clean opinion.
A clean auditor report. I.e, the auditor has concluded that the financial statements show an equally distributed results of company operations and the Financial position according to the GAAP
What is the meaning of piecemeal opinion in auditing?
Piecemeal opinion can be defined as a report which is issued by an external auditor, whereby the auditor states an opinion about certain line items inside the client’s financial statements.
The piecemeal opinion is provided by an external auditor which emphasizes an opinion limited to a specific line of item, and in a situation where there is no complete information.
Generally Accepted Accounting Principals (GAAP) do not allow auditors to be able to give piecemeal opinions and it tends to contradict the effect of the general opinion.
Breaking Down: Piecemeal Opinion
In the past when piecemeal Opinions were allowed, they had to be extremely specific so that they can be credible since a large number of an organization’s financial statements are intertwined.
Let us take, for example, the former chief Accountant Carman G. Blough, once said, that there is a possibility that piecemeal opinions can be expressed based on the accuracy of certain items listed on an organizations balance sheet, but it might not be possible to present a piecemeal opinion on the balance sheet generally, because of the balance sheets relationship with the other Financial statements, like the income statement.
External auditors can also be known as independent contractors because they focus on the justice of an organization’s financial statements, and also ensuring it is accurately reflected on the organization’s financial situation.
External auditors declare with insurance if the Financial statements are free of any material misstatement due to error or fraudulent activities.
Piecemeal Opinion express some things that are been done little by little or a stage at a time. Piecemeal can also be defined as:
- Gilbert Benson, a fictional character in the movie (Marvel Universe).
- Cyborg Villain, another fictional character in the Marvel Universe.
The piecemeal Opinion is no more permitted under the Generally Accepted Auditing Standards (GAAS). it has been previously used in some cases where a disclaimer or adverse opinion was involved in the Financial state generally.
The expression of an opinion on certain items in a financial statement is not allowed as a part of a disclaimer or the adverse opinion on Financial statements generally cause it tends to outshine or go opposite a disclaimer option of an opinion or an adverse opinion.
Materiality can be regarded as a concept in auditing and accounting, which relates to the importance and significance of an amount, transaction or respective discrepancy that might occur in the financial statements.
It stands to be one of the most important objectives of the audit arrangements since it is the auditors’ responsibility to base his opinion on the judgment regarding if financial statements are prepared, in material aspects, and include all the relevant disclosures that should be included.
Given the fact that materiality is the first and foremost pillar of financial reporting, it can be seen that it is defined in ISA 320 as a separate standard.
In this particular standard, the overall characteristics of materiality are described, which include the following:
- Misstatements are considered to be material if they are likely to influence the decisions of the end-users of the financial statements
- Judgments about materiality are subsequently based on external surrounding circumstances, which mainly include the size and nature of the subsequent misstatement
- Lastly, judgments are also based on users’ common needs as a group
Audit Materiality can be
broadly seen as Qualitative as well as Quantitative.
As far as qualitative materiality is concerned, it can be seen that it is something that is fundamentally important, because it reflects on discrepancies that exist within the financial statements, and can have an alternating impact on the decision-making process.
For example, a company might choose to amortize an asset for 25 years, whereas the useful life is only stated to be 10 years, in the disclosures presented.
Additionally, any discrepancy about contingent liabilities, or related party transactions can also make an impact on the overall state of affairs.
On the other hand, as far as quantitative materiality is concerned, it is basically numerical misstatements, or discrepancies, that would have a significant impact on the end decision-making tool.
For example, it can be seen that a line item of irrecoverable amounts (bad debts) was not disclosed in the financial statements, whereas this item, would otherwise have had a significant impact on the overall financial statements.
Why is Audit
Audit Materiality is a very important concept that bases on both, quantitative as well as qualitative aspects.
This really helps in the end-users of the financial statements to be able to use it as a tool for economic decision-making tools, as they would have sufficient knowledge pertaining to contingent liabilities, related party transactions, and any other subsequent change in accounting policy that they should be aware of.
Therefore, all these factors play a very important role in determining the overall extent to which users can base their judgments on.
Audit Materiality forms the very basis on which the auditor is able to formulate an opinion regarding the overall level of assurance that can be provided to the end-user.
This is because, they have to report whether financial statements are free from material misstatements or not, and therefore, this is the main crux around which their work revolves.
Therefore, it can be seen that Audit Materiality is a very important concept, that proves to be the basis of the scope of audit work and the ultimate audit opinion that is presented for the shareholders.
If this concept is not taken into account, then the overall point of audit assurance becomes redundant.
An unqualified opinion is an opinion that is given by auditors after their testing on the audited financial statements that contain no material misstatement and those statements are prepared and present by following all the applicable financial reporting frameworks or standards and complying with the applicable regulation.
The opinion statement is normally attached to the audit report issued by auditors to the entity after they completed their testing and satisfied with the results along with the director report as well as the audited financial statements. The director report is also called the board of directors report.
This also means that auditors have obtained all necessary audit evidence that they need to support their opinion.
In case auditors found there is a material misstatement in the financial statements and that misstatement is not pervasive to other areas, then auditors might issue a qualified opinion.
This means that all other areas in the financial statements are ok except the areas that mention.
An entity might require by law to have its financial statements audited by an independent firm and then submit the audited report to relevance government organization annually.
Or it is sometimes part of their risk management that entity is voluntarily requested auditors to review its financial statements.
An entity might require by shareholders, the board of directors, or owners to have the entity’s financial statements audited annually.
The auditing period is normally annually but sometimes it is quarterly as per management or regulation’s requirement.
The auditor is not responsible for preparing the financial statements for the entity.
But they are responsible for reviewing the entity’s financial statements that prepare by management with supporting documents and then voice their opinion objectively.
Those supporting documents including purchase invoices, sales invoices, contracts, assets’ recordings, sales recordings, purchase recordings, and other supporting documents that support financial transactions and events in the financial statements for the audit period.
Once audit comfort that after testing, they strongly believe
that the financial statements contain no material misstatements from whatever
cause, then auditors should issue the unqualified audit opinion.
Auditor and management’s
Once auditors completed their review, they are responsible for issuing audit opinions based on the result of their testing. Auditors should issue opinions objectively and no biased to any party.
Management of entity is responsible for preparing the financial statements in accordance with the accounting standards and complying with relevance law.
They are responsible for making sure that there is no material misstatement that may be caused by error or fraud in the financial statements.
To ensure that there are no risks of material misstatements
that cause by error or fraud, management should set up strong internal control
over financial reporting and equip with enough human resources.
Management is also responsible for providing all related supporting documents and records that support the financial transactions or event in the financial statements which are requested by auditors.
And also support auditors to perform their job during their audit engagement.
During the audit, based on auditing standards, auditors have to assess risks of misstatements that might be happened or happening because of fraud. However, auditors do not have primary responsibilities in detecting and investigating fraud.
Management is responsible for making sure that risks of fraud are minimizing and they also have the primary responsibility in investigating and detecting fraud that might be happened or happening in the entity.
Unqualified opinion Vs
In terms of quality of financial information in the audited financial statements, the statements that received unqualified reports explicitly show or prove that they are accurate or correct based on fact than those received qualified, disclaimer or adverse opinions.
For the statements that received qualified opinion, it is proved that some information that disclosed or presents in the financial statements could not rely on or could not be trusted.
For the statements that received a disclaimer opinion, it is proved to the users that auditors could not say something about the financial statements since they could not test the transactions or events.
Or the testing is not completed to let them express or form the opinion about whether financial statements are prepared and presented fairly and truly or not.
And it is cleared that financial information might or might not be correct. Using of such financial statements is at users’ risks.
Before performing an audit on financial statements, both auditors and management should agree on the key engagement terms and conditions first.
Those include auditor’s responsibilities, management’s responsibilities, professional fee, scope, objective, and usages of audit reports. The engagement letter should be formed and signed by both parties’ representatives.
Importance of unqualified
There are many benefits that the entity could get from when they receive the unqualified opinion for their financial statements. For example,
- Improve shareholder’s or owners’ points of view over management’s’ integrity. Because the opinion expresses that financial information is the true and fair view and it is implying that the management team who leads the entity has high integrity to their boss.
- Improve the entity’s credit from customers, suppliers, and creditors. If the audit report could be accessed by external partners like customers, suppliers as well as creditors, then the trust those parties have for the entity remain the same or even increasing. Especially, when they saw the opinion is cleaned.
- Improve administrative processing with the government’s agency. Some government agencies like tax departments might require the entity to submit an annual audit report to them. And if the financial statements receive unqualified opinion, then they probably received tax exemptions.
- Reduce audit fee, maybe right? If the current year’s financial statements receive unqualified opinion, then it could mean that the entity’s current internal control over financial statements is strong and the future auditors might reduce the fee.
- Reduce finance costs: Banks or the related financial institution might audit reports and financial statements to assess the entity’s credit score so that they could decide whether to provide the loan or not and what is the rate they should charge. And unqualified audit report could help the entity to increase the score.
Entity’s financial statements are normally audited annually by an independent audit firm as per management’s’ intention, board’s requirement, and or by law.
Big four audit firms are the well-known auditors that
provided audit services.
Basically, if auditor found no major issue on the financial statements they will issue the unqualified report.
Unqualified Audit Report issued by the auditor to financial statements when auditor found no material misstatements after their testing. This report contains the unqualified opinion from an independent auditor.
This basically means that the entity’s financial statements are prepared and presented by followed that accounting standards that they are using.
And the entity also applies the materiality concept correctly in presenting the financial information.
There are many other accounting standards that an entity might follow.
For example, US GAAP or IFRS. These two are the dominate in
the accounting world now.
Yet, some countries required companies that operated in
their countries to follow their accounting local accounting standards or we can
say local GAAP.
Why unqualified report is important for an entity?
The Audit report is important for the entity to comply with the law and/or the requirement of the board of directors. And unqualified report even more important for the entity and especially for the management that running the entity.
This report proves that management integrity to owners or shareholders is maintained at an acceptable level.
The entity might need finance or financial services from the financial institution or more specifically from banks.
This report is normally needed by those entities. And it could speed up obtaining process and also increase bargaining power in the negotiation process.
Importance of information in the audit report:
The following is the key information in the audit report. This information covering corporate information, report of directors and other key management. Auditor’s opinion normally present right after management reports.
Right after the auditor’s opinion, five financial
statements are listed ranging from balance sheet, income statement, statement
of change in equity, statement of cash flow and the last one is The noted to
These statements present financial information during the audit period.
Here is the list of those key reports:
- Corporate information
- Report of the directors
- Statement by Directors
- Report of the independence directors
- Statement of financial position
- Statement of profit or loss and other comprehensive income
- Statement of change in equity
- Statement of cash flow
- Noted to financial statements
The audit report is the report that contains the audit’s opinion which is issued by independence auditors after their examination on the entity’s financial statements and related reports.
Those including financial statements, management accounts, management reports. or others report like compliant reports.
Mostly, those reports are issued based on the result of auditors’ professional examination against the measurement criteria or standards.
For example, auditors perform their audit on the client’s financial statements against the accounting standard that used to prepare those financial statements.
In other words, they review whether or not financial statements are prepared true and fair view in accordance with the accounting standards. Those standards could be IFRS, US GAAP or local GAAP.
After completing their testing, the auditor then issues the audit report on the financial statements that they just audited. This report will also include their opinion on the financial statements.
The audit report is used by many stakeholders including the entity’s management, the board of directors, shareholders, investors, government bodies, banks, and many others.
In most cases, the audit report is issued to cover financial statements over 12 months or a year period.
Investors use audit reports and audited financial statements to assess the entity’s financial performance and financial position for their investment opportunity.
The government agency uses the audit reports and financial statements to assess the completeness and accuracy of the tax declaration.
Shareholders and the board of directors use the audit report to assess the integrity of management and transparency of financial statements.
Different types of audit report contain different audit’s opinions and the main cause are from the different of misstatements found in the financial statements. Different types of audit reports represent a different level of assurance.
Here are the four types of report that we mentioned above,
Four Types of Audit Reports:
There are four types of audit reports issued by auditors on financial statements. Each type of report contains different meanings and messages from auditors to users of financial statements.
Those audit reports included the Unqualified Audit Report (Clean Audit Report), Qualified Audit Report, Disclaimer Audit Report, and Adverse Audit Report. The following are the detail of audit reports.
#1 Unqualified Audit Report (Clean Audit Report):
Unqualified Audit Report issued by the auditor to financial statements when auditors found no material misstatements after their testing. This report contains an unqualified opinion from an independent auditor.
The report showed that the entity financial statements are prepared and present true and fair and complying with the accounting framework being used.
This is a good sign for all kinds of stakeholders that willing to uses the financial statements. You might find whether the audit report is clean or not in the opinion paragraph.
Unqualified Audit report not only apparently shown to the shareholders that financial statements are a true and fair presentation, and free from all material misstatements.
But also imply that the management team has high integrity to the shareholders.
However, before putting your truth on the audit report, make sure that the auditor who issued the reports are from independence audit firms. Big four audit firms are the firm that most of the shareholders put their truth on.
#2 Qualified Audit Report:
The qualified Audit report is the report that issue by auditors to the financial statements that found material misstatements on them. But those material misstatements are not pervasive.
For example, the opening balance of the entity contains a large number of inventories that could not verify.
In this case, the auditor issue a qualified audit opinion on the qualified audit report. However, if the auditor thinks that the misstatement is pervasive, they will issue the adverse opinion in their report.
This kind of report, only inventories that mention are matters. Others information in the financial statements is true and fair.
The term of seriousness, the qualified audit report is more serious than unqualified due to material misstatements on the mention items or accounts in the financial statements.
#3 Adverse Audit Report:
Adverse Audit Report is a type of audit report issued to the financial statements when auditors found that there are material misstatements in the financial statements.
The misstatements found here are different from the material misstatements found in qualified audit reports.
They are not only material misstated for themselves but also affect others accounts and items in the whole financial statements. These are called pervasive.
That means all the items and accounts in the whole financial statements could not be trusted by shareholders, investors, and other stakeholders.
In this report, auditors will list down the client name, financial statements that they were audited and the period the financial statements covered.
Auditor will also state all misstatements found and how they are affected the financial statements and as well as the users of financial statements.
In most cases, auditors also state all the material found the Others Matters which is the message to the users of financial statements to be aware of when they read the financial statements for their own purpose.
#4 Disclaimer Audit Report:
The disclaimer audit report is the report that issues the financial statements where there is matter to auditor’s independence and those mater cause auditors not be able to obtain sufficient audit evidence to support their opinion.
This has happened when auditors are prevented to access to certain information related to items or accounts in financial statements while those items or accounts are believed to be materially misstated and pervasive.
Auditors might not issue the disclaimer opinion if the restrictions are made only the items or accounts that material misstated but not pervasive.
Advantages of Audit Reports:
- Provide assurance on Financial Statements. Audit reports issued by a professional and independence auditor which is operational independence from the management of the entity. The report issued from them could help the users of the financial statement to assure that financial information is correct or not.
- Prove management integrity on their shareholders. As auditor is independence from management, the report could prove whether managements are honest to their shareholders or not. This is related to principle and agency theory.
- It is the requirement of law and regulation. Most of the countries required the entities which have the specific criteria to have their financial statements audited by independent auditors. Those criteria like annual turnover, the value of assets, and the number of employees. The auditor is the evidence that could prove to the government that the entity is complying with the law.
- It is the requirement of shareholders. Most of the corporate shareholders want their entity’s financial statements to be audited. This report is examined by the experts and express into the easy words that could be understood by most of the shareholders who do not have financial or audit background.
- Parent company’s requirement. Many parent companies that have subsidiaries operating in other countries or even in the same country normally required their subsidiaries’ financial statements to be audited. This report could help them manage the subsidiary even more effectively.
- Help stakeholders to understand about entity’s financial and operational situation. This is probably the most important point. The auditor is required to state the auditor report whether the entity has any going concern problem or not. This includes financial and non-financial problems that could lead the entity to face bankruptcy in the next foreseeable period from the audit report date.
Limitation of Audit Reports:
- The scope of the audit might be limited by management. This is a popular discussion about audit’ issues. In the audit standard, auditors should have the full right to access any kind of information that could help them to obtain audit evidence to express their opinion. However, in practice, management might try their best to prevent auditors to obtain some sensitive information. These are probably the management don’t fully trust auditors ethic related to confidentiality or management themselves have integrity problems. These problems might prevent auditors to provide the best quality of audit opinion that it should be.
- Time too constraints for auditors. In practice, auditor normally faces time constraints which do not provide them enough time to perform their testing as they should be.
- Auditors’ Independence. The code of ethics required auditors to stay independence from their audit clients. This is to make sure that auditors do not bias when they perform their works as well as when they issue audit opinion.
- Risks that might not detect by auditors: Inherent Risks and Fraud Risks. Audit standard requires auditors to have proper audit planning as well as risks assessment. This is to make sure that the auditing quality is maintained, and audit risks are identified and minimize. However, these things could not auditor to eliminate all kind of risks of material misstatement from financial statements. For example, inherent risks and fraud risks.
- Auditors Qualification and Competency. This is also an important point. We all know that in order to run an audit firm, someone who represents the firm needs to hold CPA qualification. But the thing is because of the competition, and because of the number of works, the quality of the audit report might have some problems. As you may know
As listed above, there are four types of audit reports and those reports are different because of the nature of material misstatements found by auditors.
Different types of audit reports contain different audit opinions. The unqualified report issued for the financial statements that contain no material misstatement.
Qualified reports on the others hand issued to the financial statements that contain material misstatement yet those misstatements are only for themselves.
The auditor will issue an adverse opinion when the financial statement contains pervasive misstatement. Yet, they will disclaim not to express their opinion if they could not have enough to review financial statements.