Auditor's Opinion, Statement and Report, Accountant's Opinion Explained
Definitions and Meaning
Business Encyclopedia, ISBN 978-1-929500-10-9. Revised 2014-07-24.
An auditor's opinion of "Unqualified" is a clear "Thumbs Up," meaning the audited statements conform to GAAP and represent the company's accounts fairly.
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 the organization's 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 item defines and explains auditor's opinion in context with similar and related terms.
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.
Audits may be undertaken by internal auditors (reporting to senior management or boards of directors), or by external (third party) auditors. An independent third party auditor's opinion is necessary when financial reports are submitted to regulatory bodies, other government organizations, lending institutions, or the investment community.
Categories of auditor's opinions
Auditor's opinions 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-.