What is an auditor's opinion?
In financial accounting, an auditor's opinion is the published outcome of an auditor's review of a company's or organization's financial statements.
The auditor's opinion does not pass judgment on reported financial position or financial performance, or otherwise interpret the financial data. The opinion simply states the auditor's conclusion that the financial statements do or do not fairly represent the financial position and performance of the company or organization, and that they do or do not conform to Generally Accepted Accounting Principles (GAAP).
This article defines and explains auditor's opinion in context with similar and related terms.
- What is an auditor's opinion?
- What are the differences between accuntant's opinion, auditor's report, and auditor's statement?
- Who performs the audit and who is responsible for the option?
- What are the four major categories of independent auditor's opinions?
What are the differences between accountant's opinion, auditor's report, and auditor's statement?
The terms auditor's opinion, accountant's opinion, auditor's report and auditor's statement all mean almost the same thing, with just small differences in emphasis.
- Accountant's opinion and auditor's opinion focus on the actual judgement (opinion) that falls in one of the four categories described below.
- Use of the word statement or report (auditor's statement, auditor's report) implies that the text includes the opinion, described below, but may also formally state the responsibilities of auditors, board of directors, and corporate officers, and also outline explicitly the scope of coverage.
Who performs financial audits? Who is responsible for the opinion?
In business, generally, the term audit refers to several kinds of reviews, inspections, and monitoring activities, all of which check the veracity and accuracy of various reports. Within the broad range of business activities, auditors may include accountants, financial specialists, project managers, line managers, technical experts, or security specialists. The single rule common to all auditing is that the auditor does not report to (cannot receive discipline or reward from) the individual being audited. Auditors are classified as either internal auditors (reporting to senior management or boards of directors), or as external, independent auditors (third party auditors).
Boards of directors, investor owners, and corporate officers in many companies rely on several kinds of internal financial audits that are built into the company's governance and control structure.
- In the hotel industry, for instance, most investor-owned hotel businesses perform internal financial audits daily (or nightly) to ensure, among other things, that local management does not allow guests to accumulate large outstanding balances. The industry even has job titles for this role, such as "Night Auditor" or "Night Accountant."
- Internal auditors across a wide range of industries are similarly employed, watching their own organizations for instances of embezzlement, accounting fraud, theft, inventory leakage, pilferage, or abuse of reimbursement policies.
Internal auditors in such cases normally report directly to—and are responsible only to—highest level corporate management or the Board of Directors.
By contrast, independent third party financial auditors, who write the formal opinions described below, are professionals completely outside the management hierarchy of the audited company or organization—hence the designation "independent." Independent auditors are usually professionally certified accountants or financial specialists, either working for themselves or for an accounting or consulting firm. They are responsible only to their own management, to regulatory bodies, to governments—and to the law.
A written opinion by an independent third party auditor is necessary, for instance, when a company submits financial results in an Annual Report to shareholders, or financial statements to regulatory bodies, governments, lending institutions, or the investment community.
What are the four major categories of independent auditor's opinions?
Formal opinions from independent auditors generally fall into four categories
1. Unqualified opinion
From the point of view of the audited company or organization, the unqualified opinion is the best possible audit outcome, and it is by far the most frequently reported opinion (the other opinions below are rarely reported, at least for audits on financial reports from publicly listed companies). When presented by a third party (external) auditor, the report assures the public that the auditor has examined the financial reports and is of the opinion that the financial information is presented fairly and in conformance with Generally Accepted Accounting Principles (GAAP).
2. Qualified opinion
A qualified opinion means the auditor found the financial reports essentially in conformance with Generally Accepted Accounting Principles, except for one or a few areas where the auditor cannot, or does not want to, assert conformance. The qualification may come about because
- The company misstated or misclassified an accounting entry (e.g., an expense item that should have appeared above the Income Statement gross profit line is inappropriately listed below gross profit, resulting in misleading gross profit and gross margin figures).
- There were limitations on the scope of audit coverage if, for instance, the auditor was unable for some reason to check certain sections or areas of the reports.
- There is remaining uncertainty about fairness or conformance with GAAP. Here, the auditor may not feel there is justification for an Adverse option, but at the same time, is not comfortable endorsing an unqualified option.
When an auditor issues a qualified opinion, the specific reasons for the qualification will be stated.
3. Adverse opinion.
An adverse opinion means the auditor has concluded that the audited financial statements do not fairly represent the organization's financial position or financial performance, and that there are significant departures from GAAP. In most cases, before publishing an adverse opinion, the auditor advises the organization's accountants and officers of the problems and works with them to correct the financial reporting situation, so that an opinion can be published that is either unqualified or qualified (1 and 2 above), rather than adverse.
When an auditor issues an adverse opinion, the report will specifically state the reasons for the opinion (specific misstatements or other departures from GAAP). An adverse opinion will almost certainly result in rejection of the organization's financial reports by the investment community, lending institutions, regulatory bodies, and governments.
4. Disclaimer of opinion
The auditor may issue a disclaimer of opinion, that is, publicly report that the auditor has chosen not to issue an opinion. This may occur when
- Auditors decide they cannot be impartial or independent regarding the company or organization audited.
- The auditor's scope of coverage was substantially limited.
- The auditor has significant uncertainties regarding the appropriateness of parts or all of the financial reports.
By Marty Schmidt. Copyright © 2004-2016.