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 reportAudit ReportAn audit report is a document prepared by an external auditor at the end of the auditing process that consolidates all of his findings and observations about a company's financial statements. 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 OpinionAuditor Gives Such An Unqualified OpinionAn unqualified opinion is concluded by an auditor appointed by the company after making substantial procedures to check the policies and procedures in place and collected optimum evidence that the organization does not include any material discrepancies or misstatements., 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 AuditQualified Opinion In The AuditThe company's auditor issues a qualified opinion in the audit report if it is found that the company's financial statements are presented fairly, but with exceptions in specific areas. It is one level below a Unqualified Opinion (i.e. Clean Opinion) and is given when the Auditor believes the financial statement has not been prepared in accordance with the rules laid down under the provisions of GAAP or IFRS. 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 entriesAccounting EntriesAccounting Entry is a summary of all the business transactions in the accounting books, including the debit & credit entry. It has 3 major types, i.e., Transaction Entry, Adjusting Entry, & Closing Entry. . (Example certain expenses are classified by the business as Capital Expenses and as such is not shown in the Profit and Loss AccountProfit And Loss AccountThe Profit & Loss account, also known as the Income statement, is a financial statement that summarizes an organization's revenue and costs incurred during the financial period and is indicative of the company's financial performance by showing whether the company made a profit or incurred losses during that period. 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 transactionsBusiness TransactionsA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company's financial statements.;
- In cases where the AuditorsThe AuditorsAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws. doubts the genuineness of certain financial data reported by the business;
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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.
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 SheetIts Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company. 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 ValueNet Realizable ValueNet Realizable Value is a value at which the asset may be sold in the market by the company after deducting the expected cost of selling the asset in the market. It is a crucial metric for determining the value of a company's ending inventory or receivables. would have resulted in Bata International Gross ProfitGross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services. 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 valuationInventory Valuation Inventory Valuation Methods refers to the methodology (LIFO, FIFO, or a weighted average) used to value the company's inventories, which has an impact on the cost of goods sold as well as ending inventory, and thus has a financial impact on the company's bottom-line numbers and cash flow situation. 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 ControlInternal ControlInternal control in accounting refers to the process by which a company implements various rules, policies, or procedures to ensure the accuracy of accounting and finance information, safeguard the various assets of the business, promote accountability in the business, and prevent the occurrence of frauds in the company. 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.
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 statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels. 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.
This has been a guide to Audit Report Qualified Opinion and its definition. Here we discuss some of the areas which can lead the Auditors expressing a qualified opinion in the Audit Report along with few circumstances, which can result in an Auditor expressing a Qualified Opinion. You can learn more about financing from the following articles –