Under what circumstances would a qualified opinion be issued by an auditor?

In an audit engagement, the auditor gives his opinion on the financial information disclosed by your business. The auditor’s report is an integral element of your business’s audited financial statement. At the culmination of the audit engagement, the auditor expresses his opinion in the auditor’s report, which can be qualified or unqualified.

Audit Report Layout

The auditor’s report begins with a brief introduction about the audit engagement. Thereafter, the auditor’s report is divided in to three major sections. In the first section, the auditor explains that preparing the financial statements and maintaining sound internal controls is management’s responsibility.

In the second section, the auditor explains its own responsibilities, duties and rights regarding the engagement. Here, the auditor emphasizes the nature of the audit and states that the auditor only examines internal controls and accounting records on a sample basis. In the third section, the auditor gives his opinion on the financial statements.

An Unqualified Report

In an unqualified report, the auditors conclude that the financial statements of your business present fairly its affairs in all material aspects. The opinion embodies the assumptions that your business observed compliance with generally accepted accounting principles and statutory requirements. Also known as a clean report, such a report implies that any changes in the accounting policies, their application and effects, are adequately determined and divulged.

This opinion does not tell that your business is in good economic health. It merely states that your financial report is transparent and thorough and has not hidden important facts.

A Qualified Report

A qualified report is one in which the auditor concludes that most matters have been dealt with adequately, except for a few issues. An auditor’s report is qualified when there is either a limitation of scope in the auditor’s work, or when there is a disagreement with management regarding application, acceptability or adequacy of accounting policies. For auditors an issue must be material or financially worth consideration to qualify a report. The issue should not be pervasive, that is, the issue should not misrepresent the factual financial position.

If issues are material and pervasive, the auditor issues a disclaimer or adverse opinion. A qualified audit report does not mean that your business is suffering, and it doesn't mean that your financial statement isn't transparent. It merely reflects the auditor’s inability to give a clean report.

Other Differences in the Opinion Paragraph

Another difference lies in the wording of the opinion paragraph of an auditor’s report. When issuing an unqualified report the auditor might write, “In our opinion, the financial statements give a true and fair view of the financial position of XYZ Enterprises as of ….” Conversely, the opinion paragraph in a qualified report might begin with, “In our opinion, except for the effects of the following adjustments, if any, as might have been determined to be necessary had we been able to perform tests on companies stocks, the financial statements give a true and fair view of the financial position of XYZ Enterprises as …. “

Notice that there are “exceptions” in the opinion paragraph of the qualified report.

Impact of Auditors' Opinions

As a businessperson, you should keep in mind that there are deep-held perceptions about auditors' opinions. Banks, investors and regulators such as the IRS rely on audited financial statements for their analytical needs. Stakeholders such as banks and investors view qualified audit report unfavorably. Therefore, you should hope to receive an unqualified audit report because it gives a positive impression of your business.

For example, if your business was issued a qualified audit report on inventory matters, your bank is more likely to demand further details about your inventory before issuing credit to you.

The first page of audited financial statements is the auditor’s report. This is an important part of the financials that shouldn’t be overlooked. It contains the audit opinion, which indicates whether the financial statements are fairly presented in all material respects, compliant with Generally Accepted Accounting Principles (GAAP) and free from material misstatement.

In general, there are four types of audit opinions, ranked from most to least desirable.

1. Unqualified

A clean “unqualified” opinion is the most common (and desirable). Here, the auditor states that the company’s financial condition, position and operations are fairly presented in the financial statements.

2. Qualified

The auditor expresses a qualified opinion if the financial statements appear to contain a small deviation from GAAP but are otherwise fairly presented. To illustrate: An auditor will “qualify” his or her opinion if a borrower incorrectly estimates the reserve for a contingency, but the exception doesn’t affect the rest of the financial statements.

Qualified opinions are also given if the company’s management limits the scope of audit procedures. For example, a qualified opinion may have resulted if you denied the auditor access to year-end inventory counts due to safety concerns during the COVID-19 pandemic.

3. Adverse 

When an auditor issues an adverse opinion, there are material exceptions to GAAP that affect the financial statements as a whole. Here, the auditor indicates that the financial statements aren’t presented fairly. Typically, an adverse opinion letter outlines these exceptions.

4. Disclaimer

 Even more alarming to lenders and investors is a disclaimer opinion. Disclaimers occur when an auditor gives up in the middle of an audit. Reasons for disclaimers may include significant scope limitations, material doubt about the company’s going-concern status and uncertainties within the subject company itself. A disclaimer opinion letter briefly outlines the auditor’s reasons for throwing in the towel.

Beyond the opinion

Auditors’ reports for public companies also must include a discussion of so-called “critical audit matters” (CAMs). Essentially, these are the most complicated issues that arose during the audit. CAMs are specific to the engagement and the year of the audit. As a result, they’re expected to change from year to year.

This requirement represents a major change to the pass-fail audit opinions that have been in place for decades. It’s intended to give stakeholders greater insight into the company’s disclosures and the auditor’s work when issuing an unqualified opinion. Contact us for more information on audit opinions.

Under what circumstances is the expression of a qualified opinion appropriate?

In which of the following circumstances would an auditor usually choose between issuing a qualified opinion or a disclaimer of opinion?

In which circumstances the qualified report can be given?