What Do Auditors Do During an Audit?
Before the audit, management provides financial information to the audit committee. During the annual audit, the auditor has to review the processes and procedures that the company used to prepare the financial information. The auditors check to see whether the company uses GAAP or other applicable reporting frameworks in preparing the reports.
Annual audits demonstrate transparency in corporate financial reporting, which is a positive step in establishing good relationships between companies and their investors, as well as the public.
Four Different Types of Auditor Opinions
Auditors have the option of choosing among four different types of auditor opinion reports. An auditor opinion report is a letter that auditors attach to the statutory audit report that reflects their opinion of the audit. The four types of auditor opinions are:
Unqualified opinion-clean report
Qualified opinion-qualified report
Disclaimer of opinion-disclaimer report
Adverse opinion-adverse audit report
Unqualified Opinion – Clean Report
An unqualified opinion is considered a clean report. This is the type of report that auditors give most often. This is also the type of report that most companies expect to receive. An unqualified opinion doesn’t have any kind of adverse comments and it doesn’t include any disclaimers about any clauses or the audit process. This type of report indicates that the auditors are satisfied with the company’s financial reporting. The auditor believes that the company’s operations are in good compliance with governance principles and applicable laws. The company, the auditors, the investors and the public perceive such a report to be free from material misstatements.
Qualified Opinion-Qualified Report
When an auditor isn’t confident about any specific process or transaction that prevents them from issuing an unqualified, or clean, report, the auditor may choose to issue a qualified opinion. Investors don’t find qualified opinions acceptable, as they project a negative opinion about a company’s financial status. Auditors write up a qualified opinion in much the same way as an unqualified opinion, with the exception that they state the reasons they’re not able to present an unqualified opinion.
A common for reason for auditors issuing a qualified opinion is that the company didn’t present its records with GAAP.
Disclaimer of Opinion-Disclaimer Report
When an auditor issues a disclaimer of opinion report, it means that they are distancing themselves from providing any opinion at all related to the financial statements. Some of the reasons that auditors may issue a disclaimer of opinion are because they felt like the company limited their ability to conduct a thorough audit or they couldn’t get satisfactory explanations for their questions. They may not have been able to decipher the correct nature of some transactions or to secure enough evidence to support good financial reporting. Auditors that aren’t allowed an opportunity to observe operational procedures or to review particular procedures may feel like they’re not able to express a definite opinion, so they feel a disclaimer is necessary and in order. The general consensus is that a disclaimer of opinion constitutes a very harsh stance. As a result, it creates an adverse image of the company.
Adverse Opinion-Adverse Audit Report
The final type of audit opinion is an adverse opinion. Auditors who aren’t at all satisfied with the financial statements or who discover a high level of material misstatements or irregularities know that this creates a situation in which investors and the government will mistrust the company’s financial reports.
An auditor’s adverse opinion is a big red flag. An adverse audit report usually indicates that financial reports contain gross misstatements and have the potential for fraud. Adverse opinions send out a high alert that the company’s records haven’t been prepared according to GAAP. Financial institutions and investors take this opinion seriously and will reject doing any kind of business with the company.
Auditors use all types of qualified reports to alert the public as to the transparency, reliability and accountability of companies. Auditor opinions place pressure on companies to change their financial reporting processes and incorporate practices like ESG and cybersecurity healthcare governance so that they’re clear and accurate. Companies, investors and the public highly value unqualified reports.