The Types of Audit Reports

Here are the four types of audit reports that are given by external auditors:

1. Unqualified Opinion
An unqualified opinion indicates that the information presented in a company’s financial
report is clean. As in a medical patient’s clean bill of health, an unqualified opinion shows
that the audited financial statements can be presumed to be free from misstatements.

2. Qualified Opinion
An opinion rendered in a qualified audit report is similar to an unqualified opinion; however,
the auditing body cannot express an unqualified opinion for several reasons. One reason
could be that the company did not present its financial records in accordance with generally
acceptable accounting principles (GAAP).

3. Disclaimer Opinion
Auditors give a disclaimer when they are unable to express a definite opinion. This can be
due to the lack of properly maintained financial records or the absence or insufficient
support from the management. For instance, an auditor may not have had the opportunity to
fulfill tasks that they deem to be crucial to the audit, such as observing operational
procedures or reviewing particular procedures.

4. Adverse Opinion
When auditors issue an adverse opinion, it indicates that there has been a gross
misstatement and, possibly, fraud, in the preparation of the company’s financial records. An
adverse opinion shows that the company’s records have not been prepared in accordance
with GAAP. Public entities that receive this kind of opinion are obligated to Financial
statements with adverse audit opinions are typically rejected by financial institutions or
investors.

What happens during an audit?

During the statutory audit, the auditor has to review the processes and procedures by which
the financial information was prepared. That is, the auditor has to check whether the
preparation of the company’s financial reports is aligned with GAAP or other applicable
reporting frameworks.
Statutory audits underscore the importance of financial reporting in corporate
transparency. By ensuring financial transparency, entities can help establish a good
relationship with their investors and the public.
In preparing for an audit, it's important that you have set internal controls and policies that
are monitored and reviewed by your internal audit team. Do you want to learn more about
the steps you need to take to prepare for it? Read our primer on D&V’s Audit Support
Group and find out how our experts can guide you through the key steps.

An audit report is an appraisal of a small business’s complete financial status. Completed by an

independent accounting professional, this document covers a company’s assets and liabilities, and
presents the auditor’s educated assessment of the firm’s financial position and future. Audit reports
are required by law if a company is publicly traded or in an industry regulated by the Securities and
Exchange Commission (SEC). Companies seeking funding, as well as those looking to improve
internal controls, also find this information valuable. There are four types of audit reports.

Unqualified Opinion

Often called a clean opinion, an unqualified opinion is an audit report that is issued when an auditor
determines that each of the financial records provided by the small business is free of any
misrepresentations. In addition, an unqualified opinion indicates that the financial records have been
maintained in accordance with the standards known as Generally Accepted Accounting Principles
(GAAP). This is the best type of report a business can receive.

Typically, an unqualified report consists of a title that includes the word “independent.” This is done
to illustrate that it was prepared by an unbiased third party. The title is followed by the main body.
Made up of three paragraphs, the main body highlights the responsibilities of the auditor, the
purpose of the audit and the auditor’s findings. The auditor signs and dates the document, including
his address.

Qualified Opinion

In situations when a company’s financial records have not been maintained in accordance with
GAAP but no misrepresentations are identified, an auditor will issue a qualified opinion. The writing
of a qualified opinion is extremely similar to that of an unqualified opinion. A qualified opinion,
however, will include an additional paragraph that highlights the reason why the audit report is not
unqualified.

Adverse Opinion

The worst type of financial report that can be issued to a business is an adverse opinion. This
indicates that the firm’s financial records do not conform to GAAP. In addition, the financial records
provided by the business have been grossly misrepresented. Although this may occur by error, it is
often an indication of fraud. When this type of report is issued, a company must correct its financial
statement and have it re-audited, as investors, lenders and other requesting parties will generally not
accept it.

Disclaimer of Opinion

On some occasions, an auditor is unable to complete an accurate audit report. This may occur for a
variety of reasons, such as an absence of appropriate financial records. When this happens, the
auditor issues a disclaimer of opinion, stating that an opinion of the firm’s financial status could not
be determined.

Auditor's Opinion
What is an 'Auditor's Opinion'
An auditor's opinion is a certification that accompanies financial statements
based on an audit of an accountant's opinion on the procedures and records
used to produce the statements regardless of whether material misstatements
exist in the financial statements. For audits of companies in the United States,
the opinion may be an unqualified opinion in accordance with generally accepted
accounting principles (GAAP), a qualified opinion, or an adverse opinion. The
audit is performed by an accountant who is independent of the company being
audited.

An auditor's opinion is also called accountant's opinion.

BREAKING DOWN 'Auditor's Opinion'

An auditor's opinion is presented in an auditor’s report. The audit report begins with an
introductory section outlining the responsibility of management and the responsibility of
the audit firm. The second section identifies the financial statements on which the
auditor's opinion is given. A third section outlines the auditor’s opinion. Although it is not
found in all audit reports, a fourth section may be presented as further explanation
regarding a qualified opinion or an adverse opinion.

Unqualified Opinion
An unqualified opinion is also known as a clean opinion. The auditor reports an
unqualified opinion if the financial statements are presumed to be free from material
misstatements. In addition, an unqualified opinion is given over the internal controls of
an entity if management has claimed responsibility for its establishment and
maintenance, and the auditor has performed fieldwork to test its effectiveness.

Qualified Opinion
A qualified opinion is given when a company’s financial records have not been
presented in accordance with the generally accepted accounting principles (GAAP).
Although the wording of a qualified opinion is very similar to an unqualified opinion, the
auditor provides an additional paragraph including exclusions from the cleanliness of
the financial statements and points out why the auditor report is not unqualified.

Adverse Opinion
The most unfavorable opinion a business may receive is an adverse opinion. An
adverse opinion indicates financial records are not in accordance to GAAP and are
grossly misstated. An adverse opinion may be an indicator of fraud, and public entities
that receive an adverse opinion are forced to correct their financial statements and have
the financial statements re-audited. Investors, lenders and other financial institutions do
not typically accept financial statements with adverse opinions.

Disclaimer of Opinion
In the event the auditor is unable to complete the audit report due to 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. A disclaimer of opinion is not an opinion itself.

Definition:
Audit opinion is the statement that express by independence auditors to
their client’s financial statements as the result of auditors’ examination.
Audit opinion is very important for stakeholders because it let them know
whether or not the information in the financial statements that they are
using is correct or not. The audit opinion also indirectly inform to the
users of financial statements how is the integrity of senior management
of the entity.
If auditors follow international standard, then the ISA that use as the
principle to form audit opinion is ISA 700 and ISA 705. ISA 700 is used
to form unmodified audit opinion and ISA 705 is guidance that should
use by auditor to issued modified opinion.
As required by standard, auditors will have to issue the opinion on
client’s financial statements whether those financial statements, after
audited, are prepared in all material respected and compliance with the
framework that they used or not.
And if the financial statements meet all of these things, then unmodified
opinion shall be issued. Yet, if the financial statements have some
problem, auditors need to use ISA 705 to form their opinion based on
those problems.
Audit Opinion Flow Chart
In general, there are two main types of audit opinion: Unmodified
and Modified Opinion. In Unmodified Opinion, auditors issues this
opinion to financial statements that prepared in all material respect and
comply with accounting standards being use.
However, for Modified Opinion, there are three sub opinions which are
issued to financial statements that are not prepared in material respect
with others matter. We will discuss later.

Related article Audit committee: Definition, Requirements, Role and

Responsibilities, Advantages, Disadvantages

Those three modified opinion are: qualified, adverse and disclaimer

opinion. So, in total, there are four types of audit opinion right?
Unmodified(unqualified),qualified, adverse and disclaimer opinion.
Let see the Audit Opinion Flow Chart below to gain better understanding:
See audit Approach here: Audit Approach
Now let check what are those four audit opinions and what they are
issued for.
Type of audit’s opinions:
Here is the list of four types of audit opinion,
Unmodified Opinion:
As mention above, unmodified opinion is expressed to the financial
statements that prepared in all material respect and complying with
applicable framework. This opinion is issued once auditors obtain
sufficient and appropriate audit’s evidence to the financial statements as
the result of their testing.
Please noted that auditor is not provide absolute assurance on the
financial statements that is why it use words “in all material respect”.
All material respect here mean there is no material misstatement in the
financial statements, but there might be immaterial misstatement. It is
okay to have immaterial misstatement in the financial statements as it is
not lead users of FS to make wrong decision. To form unmodified
opinion, ISA 700 is the reference to follow.
Now let move to others three opinion of modified opinion.
Qualified Opinion:
Qualifies opinion is type of modified audit opinion where auditors make
conclusion after their testing that there are material misstatement found
in the financial statements; however, those misstatements are not
pervasive. Pervasive here is a bit subjective as it is based on auditors
judgement.
But, as said in standard, misstatement is pervasive to financial
statements if those misstatements are not effect the financial statements
and users decision making. Auditor may issued qualified opinion on the
opening balance of financial statements of the previous year financial
statements were not audit by them.

Related article Inventory observation

In term of seriousness, the qualified audit opinion is serious than

unqualified, yet it is better than adverse and disclaimers. We will talk
about disclaimer and adverse opinion later in this article.
Adverse Opinion:
Adverse opinion is issued to the financial statements where auditors
examined and concluded that the those financial statements are
materially misstated and pervasive. Compared to qualified
opinion, adverse opinion is more serious than. This opinion is the
message to users of financial statements that they should not rely on
these financial statements in their decision making.
This opinion is a bit different from qualified opinion. For qualified opinion,
auditor found material misstatement in the financial statements, but
those misstatements are not pervasive. Yet, Adverse opinion,
misstatements are both material and pervasive.
Disclaimer of Opinion:
Disclaimer of opinion by the way is different from both qualified and
adverse. Auditor issued the disclaimer of opinion where they could not
obtain and unable to access the audit evidence for individual items or in
aggregation in the to support their testing.

Auditor believe that, for those items that they are not able to access and
obtain information could be materially misstate and pervasive. This is
happen after auditor try their best to negotiate with client to obtain all of
those importance information and client still reject no matter it is intention
or unintentional.
What audit standards do auditors use as the basic
to express their opinion?
It is depending on the country where auditor firm is operating in. Auditors
will perform their work based on the audit standards that allow by local
authority who control the audit firms. However, auditors should also
making sure that those practices are not so far from international
standard on auditing.

Related article Ultimate Guideline to Prepare Annual Internal Audit Planning

For example, if your firm is operating in Thailand, that mean your firm
need to follow Thailand audit standards. However, in practices, maybe
there are some local standards which is not totally agreed to ISA. In this
case, auditors need to check with the international audit standard what it
is required auditor to do on that point.
For ISA, ISA 700 and ISA 705 is the standard that guide auditor on how
to deal with modified and unmodified audit opinion.
Where can we find audit opinion in audit report?
Audit opinion is stated in the audit report in the opinion section.
Normally, in the audit report, there are significant importance information
that we could find. For example, entity’s background, list of four financial
statements and their noted, list of all significant accounting policies,
opinion section including basic of opinion and opinion, and Others
matters.
In audit report we also could find auditor role and responsibilities on
financial statements, and managements’ roles and responsibilities to
financial statements. This is to ensure that the users who use the audit
report could clearly understand that there is no conflict of interest
between auditors and managements roles on preparation of financial
statements.
If you have any comment on this article, please comment below or email
to contact me here. I will manage to respond.