What is an Audit Report Qualified Opinion?
Qualified opinion in the audit report is given by Auditor of the company in case it is found that financial statements are presented fairly by the company, however, with the exception in specific areas. It is just one notch below to an Unqualified Opinion (i.e. Clean opinion) and is issued in those cases where the Auditor feels that the financial statement is not prepared in accordance with the rules laid down under the provisions of GAAP/IFRS (Generally Accepted Accounting Principles/International Financial Reporting Standards) whichever applicable.
The Audit report qualified opinion is almost similar in nature to an Unqualified audit report Opinion with the only exception that certain records pertaining to Financial Statements, as per the advice of Auditor, are not in conformity to the standards as laid down in GAAP/IFRS without giving any indication of misrepresentation of facts and figures. Whenever an Auditor gives such an Unqualified Opinion, they will highlight the reasons for the same in a separate/ additional paragraph.
Some of the areas which can lead to Auditors expressing a qualified opinion in the Audit Report are:
- If the financial statements make an exception to the accounting principles such as deviation from Generally Accepted Accounting Principles (GAAP) or stated disclosures are incomplete in nature, the Auditor may issue an Audit report qualified opinion and explain such exceptions in the Audit Report.
- In cases where there is disagreement in the possible treatment of certain items between the Management and the Auditor, it may also take the form of the wrong classification of accounting entries. (Example certain expenses are classified by the business as Capital Expenses and as such is not shown in the Profit and Loss Account but directly capitalized in the Balance Sheet, however, if the Auditor has a different view on the same and is not satisfied with the classification of such expenses, may issue an Unqualified audit report Opinion and provide the reason for the difference in opinion in a separate paragraph in Audit Report.
- In cases where there is a limitation in work undertaken by the Auditor on account of insufficient information or incomplete reports furnished by the management to verify certain business transactions;
- In cases where the Auditors doubts the genuineness of certain financial data reported by the business;
Qualified Opinion in the Audit Report Examples
Let’s understand with the help of a few examples, which can result in an Auditor expressing a Qualified Opinion.
Under-Reporting of Provisions
Rathi and Associates conducted Audit of ABC International as per the relevant provision of the Act and observed that the Sundry Debtors/Accounts Receivables reported by ABC International includes an amount of $40000 which is due from an entity which has ceased its operations and the debt is unsecured, and the company doesn’t have any security to liquidate and realize its dues. Accordingly, ABC International must make a complete provision of $40000 in its Profit and Loss Account and reduce its Profit by the same amount before adjusting for tax.
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As such, in my opinion (Auditor Remark), except for the matter described above as the basis for an Audit report qualified opinion, the financial statements present a true and fair view of the financial position of ABC International.
Incorrect Treatment of Business Inventory
Franklin and Associates conducted Audit of Bata International and Observed that the company had reported Inventories on its Balance Sheet at Cost instead of the ideal practice of stating at lower of Cost or Net Realizable Value as per the relevant Accounting Standard pertaining to Valuation of Inventories. As per the records shared by Bata International if such Inventories were recorded at lower of Cost or Net Realizable Value would have resulted in Bata International Gross Profit falling by $20000 and Income Tax Expenses reduced by $2000 and Net Profit down by $18000 respectively.
As such, in my opinion (Auditor Remark), except for the incorrect inventory valuation treatment described above as the basis for an Audit report qualified opinion, the financial statements present a true and fair view of the financial position of Bata International.
Insufficient Information Furnished
Clark and Associates conducted Audit of Moon Pharmaceuticals Limited, which reported revenues of $250000, out of which $50000 were cash sales. Auditors were unable to factually satisfy themselves about the cash sales recorded by the company due to inadequate systems of Internal Control and recording of such Cash Sales. As such, it is impossible to certify that the recorded revenues are free from material error relating to the Overstatement of Revenues.
As such, in my opinion (Auditor Remark), except for the matter described above as the basis for an audit report qualified opinion, the financial statements present a true and fair view of the financial position of Moon Pharmaceuticals.
Conclusion
Audit report qualified opinion remark can be on account of multiple reasons and is a sign for all stakeholders to understand that the quality of a business is deteriorating, and some parts of the financial statements are not found to be transparent by the Auditor. Whenever an Auditor provides a Qualified Audit report, it is supported by the reasons for the same, and it is the responsibility of stakeholders of the business and Analyst and other investors to go through the same and understand the severity of such an opinion and make an informed decision.
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