Auditor’s Opinion Definition
An auditor’s opinion is a statement presented by an independent auditor revealing the authenticity of a company’s financial statements. Since it bespeaks the fairness of corporate financial reporting, stakeholders of the company rely on it to make important financing decisions. A positive audit opinion reinforces the relationship between the company and its stakeholders.
Audit opinion is a pertinent section of an 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. presenting the financial condition of a firm from its auditor’s perspective. It reassures that the statements are prepared in accordance with the rules and regulations of the applicable financial reporting framework. Audit opinion is of four types, i.e., unqualified audit opinion, qualified audit opinion, adverse audit opinion, and disclaimer.
Table of contents
- Auditor’s Opinion Definition
- An auditor’s opinion is a formal certification of the correctness and fairness of an entity’s financial statements by an independent auditor. It ensures corporate accounting transparency.
- Auditors use their professional judgment and legal considerations to form an accurate opinion helping foster relations between the entity and investors.
- There are four types of auditor’s opinion, i.e., Unqualified, Qualified, Adverse, and Disclaimer.
- Auditors check whether an organization’s operational controls and accounting policies conform to the GAAP (Generally Accepted Accounting Principles).
Auditor’s Opinion Explained
A financial auditFinancial AuditFinancial audit is an independent examination of the financial statements of an entity irrespective of its size. It is done by auditors or audit firms who provide an opinion regarding the accurate and fair view of the facts & figures mentioned in the financial statements. process is an assessment of the financial affairs of a company. It allows an independent accountant, usually qualified and certified, to scrutinize its 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. and express an opinion on their accuracy and integrity. The auditor’s opinion is communicated through an audit report.
An audit report is the final product of the audit process. It communicates multiple financial aspects of the business, the most important being the auditor’s opinion. Investors rely on the audit opinion to know if they can trust a company’s financial statements to make decisions.
Drafting of Audit Opinion
The annual audit procedure begins after the business administration offers accounting information to the auditing committee. Next, the auditors Auditors An 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.examine if the company employs GAAPGAAPGAAP (Generally Accepted Accounting Principles) are standardized guidelines for accounting and financial reporting. (Generally Accepted Accounting Principles) to produce the financial details. They also evaluate the methodologies and approaches used by a firm.
After that, they ensure that the financial records are free from material misstatement, error, or fraud. Then, they form an opinion on the company’s accounting statements Accounting Statements An accounting statement or account statement refers to a document that summarizes the financial details of an account during a given period. An example of an accounting statement is a bank account statement. A bank account statement reflects the source and amount of every transaction within a selected period. Different accounting statements serve other purposes, but they all act as written proof that helps resolve disputes.based on the audit evidenceAudit EvidenceAudit evidence is information gathered by auditors during the course of an audit, whether internal, statutory, or otherwise. These facts serve as the foundation for the opinion in the audit report. gathered during the audit process.
Finally, they draft the audit opinion and affix it in the audit report. The audit opinion section typically encompasses four parts. It includes an introductory paragraph, a description of the management’s responsibility, an explanation of the auditor’s duties, and an opinion paragraph.
Purpose of Audit Opinion
The auditor is essentially an individual unassociated with the firm being audited to guarantee a transparent audit process. Hence, audit opinion reflects an unbiased perspective on an entity’s financial reporting.
It informs the general public and prospective shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares. about an entity’s honesty, responsibility, and authenticity. This coerces the firm to review and modify its financial reportingFinancial ReportingFinancial reporting is a systematic process of recording and representing a company’s financial data. The reports reflect a firm’s financial health and performance in a given period. Management, investors, shareholders, financiers, government, and regulatory agencies rely on financial reports for decision-making. techniques to project clarity.
Hence, the companies must ensure the effectiveness and constant analysis of their accounting policiesAccounting PoliciesAccounting policies refer to the framework or procedure followed by the management for bookkeeping and preparation of the financial statements. It involves accounting methods and practices determined at the corporate level. and operational controls to get unqualified audit opinions.
Types of Auditor’s Opinion
There are four crucial audit opinion types:
#1 – Unqualified audit opinion
Unqualified audit opinionUnqualified Audit 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. expresses the satisfaction of an auditor with the entity’s financial reporting. It means the company has prepared and presented its accounting records fairly and accurately in compliance with the GAAP and other applicable laws.
Most companies seek such an opinion as a validation stamp that helps the firm bring more investors and moneylenders. Regarded as a clean report, it is devoid of any unpleasant remarks or disclaimer about the audit method.
#2 – Qualified audit opinion
Qualified audit opinionQualified Audit OpinionThe 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. states unverifiable details and any limitations on the scope of work done by an auditor. This indicates an auditor’s reluctance to issue an unqualified opinion due to lack of audit evidence, issues with GAAP compliance (non-pervasive), or restrictions on the audit process.
Resultantly, a qualified opinion affirms the fairness of the accounting records with some exceptions. Hence, the opinion can be considered neutral, clearly citing the auditor’s concerns. Both unqualified and qualified opinion reports are written the same way, except the latter includes reasons behind an unclean report.
#3 – Adverse audit opinion
An adverse opinionAdverse OpinionAn adverse opinion is the auditor's findings of misrepresentation and misstatement of the company's financial health and performance as identified in the financial statements. It is the conclusion of the professional assessment of the corporate accounts depicting false or unfair business practice. specifies an extremely suspicious accounting statement that can diminish the company’s market position, sometimes causing a lawsuit. Auditors who spot extensive material misstatements and are fully dissatisfied with the accounting statements have to present such a viewpoint.
The high level of misrepresentation may also result in fraudulent activities. Needlessly, financers and investors view this as a red flag avoiding any commercial activity with the audited entity.
#4 – Disclaimer
Disclaimer happens when there is no audit opinion due to lack of accounting documents or non-cooperation of the client’s executive team. For example, auditors avoid providing views when their questions remain unanswered or are acknowledged improperly.
They may fail to gather sufficient evidence to back excellent financial statistics or be incapable of identifying the actual nature of some dealings. So, auditors who cannot scrutinize operational processes or assess specific techniques prefer to issue a disclaimer.
Auditor’s Opinion example
Here is a snapshot of the audit report of Tesla Inc. for the year 2020. The auditor is PricewaterCoopers LLP (PWC). As evident, the auditor issued an unqualified audit opinion on Tesla’s financial statements assuring its accuracy and fairness.
A news snippet from Reuters discusses the fourth audit failure of the US Pentagon. The department’s Chief Financial Officer (CFO) mentioned the firm’s struggle with systems and accounting issues though he stated its consistent progress in the direction of success.
Nearly 1200 auditors evaluated the record-keeping procedures and systems globally on military personnel, property, and weapons systems. This occurred on 1069 virtual visits and 278 site visits.
The audit has substantially helped US Pentagon polish its controls and systems with time. Also, it has assisted the Department of Defense to discover the misplaced inventory and save bucks.
Frequently Ask Questions (FAQs)
A – The four major types of audit opinion are Unqualified, Qualified, Adverse, and Disclaimer. Of these, unqualified is the most sought after as it expresses the auditor’s satisfaction with the entity’s financial reporting. The qualified opinion presents an opinion highlighting certain issues. However, adverse and disclaimer opinions reveal major concerns with financial reporting.
A – An adverse audit opinion refers to the complete misrepresentation of an entity’s financial statements. Thereby, this hinders the accurate reflection of its financial performance and status.
A – The auditor’s opinion helps sustain transparency and accountability between the company and its investors or the general public. If required, this lets the firm amend its accounting policies to improve reporting of its operations.
A – The best auditor’s opinion is an unqualified opinion. It verifies the legitimacy of an entity’s financial statements and their compliance with the GAAP standards. This is considered the best type of audit opinion to be received by a business.
This has been a guide to Auditor’s Opinion & its Definition. Here we discuss the auditor’s opinion on financial statements along with types & examples. You may also have a look at the following articles to learn more –