What is an Unqualified Audit Opinion? Definition, Explanation, Example, and Advantages (Importance)

Definition:

An unqualified audit opinion is an opinion auditors give after testing the audited financial statements containing no material misstatement. Those statements are prepared and presented 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 are satisfied with the results, along with the director report and 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 to support their opinion.

If auditors find a material misstatement in the financial statements and that misstatement is not pervasive in 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.

Explanation:

An entity might require by law to have its financial statements audited by an independent firm and then submit the audited report to relevant government organizations annually.

Or it is sometimes part of their risk management that the entity is voluntarily requested auditors to review its financial statements.

An entity might require 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 requirements.

The auditor is not responsible for preparing the financial statements for the entity.

But they are responsible for reviewing the entity’s financial statements prepared by management with supporting documents and then voicing their opinion objectively.

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Those supporting documents include 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 the 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 responsibilities:

Once auditors complete their review, they are responsible for issuing audit opinions based on the result of their testing. Auditors should issue opinions objectively and no biased against any party.

Management of the entity is responsible for preparing the financial statements by the accounting standards and complying with relevant laws.

They are responsible for ensuring that there is no material misstatement caused by error or fraud in the financial statements.

To ensure that there are no risks of material misstatements caused by error or fraud, management should set up strong internal control over financial reporting and equip enough human resources.

Management is also responsible for providing all related supporting documents and records that support the financial transactions or events in the financial statements which are requested by auditors.

And also support auditors in performing their job during their audit engagement.

During the audit, based on auditing standards, auditors have to assess risks of misstatements that might be happened happening because of fraud. However, auditors do not have primary responsibilities in detecting and investigating fraud.

Management is responsible for ensuring that fraud risks are minimized, and they also have the primary responsibility of investigating and detecting fraud that might be happening or happening in the entity.

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Unqualified opinion Vs. Other opinions:

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 opinions, it is proved that some information disclosed or presented in the financial statements could not be relied on or trusted.

For the statements that received a disclaimer opinion, it was 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 an opinion about whether financial statements are prepared and presented fairly and truly or not.

And financial information might or might not be correct. Using such financial statements is at users’ risk.

Engagement letter:

Before performing an audit on financial statements, both auditors and management should agree on the key engagement terms and conditions first.

Those include the auditor’s responsibilities, management’s responsibilities, professional fees, scope, objectives, and usages of audit reports. The engagement letter should be formed and signed by both parties’ representatives.

Importance of unqualified audit opinion:

There are many benefits that the entity could get from when they receive an 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, it implies 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 remains the same or even increases. 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. And if the financial statements received an unqualified opinion, then they probably received tax exemptions.
  • Reduce audit fee, maybe, right? If the current year’s financial statements received an unqualified opinion, 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 rate they should charge. An unqualified audit report could help the entity to increase its score.
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