Which audit opinion is the best?
In financial reporting, an auditor's opinion is the outcome of an auditor's review of an organization's financial statements. The auditor's opinion does not judge the financial position of the reporting entity. Nor does it otherwise interpret accounting data. Instead, the auditor publishes an opinion addressing two questions: Show
Four Names For the OpinionNote that formal audit results may be called Auditor's Opinion, Report, or Statement. Or, they may also appear as Accountant's Opinion, Report, or Statements. These terms all mean almost the same thing.
The auditor's opinion Unqualified is a definite "Thumbs Up." It means audited statements (1) conform to GAAP and (2) represent the company's accounts fairly. [Photo: Corporate office, Brooklyn, New York, 1932.] The auditor's opinion Unqualified is a definite "Thumbs Up." It means audited statements (1) conform to GAAP and (2) represent the company's accounts fairly. [Photo: Corporate office, Brooklyn, New York, 1932.] Four Possible Audit OutcomesSections below further define and explain financial reporting audits. This article explains the four primary audit outcomes:
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ResourcesVisit the Master Analyst Shop. Download Ebooks & Software Today! Who Performs the Audit?Who is Responsible for the Opinion?An audit examines a report. Its purpose is to assess report transparency and accuracy. Auditors perform these inspections and take personal responsibility for audit results. In business, auditors may be accountants, financial specialists, project managers, line managers, technical experts, security experts, and others. The only universal requirement for working as an auditor is recognizable expertise in the area under audit. This recognition is crucial because the resulting opinion must speak with authority. Two rules also apply universally for auditing:
These rules, naturally, reinforce auditor impartiality. Auditors serve as either internal or external auditors.
Internal Financial AuditsDirectors and officers in many firms rely on internal financial audits. As a result, corporate officers and boards of directors build internal financial audits into the firm's governance structure. Investor-owned hotels, for example, run financial audits nightly. They do this because they must be sure that managers and other staff do not allow guests to build large outstanding balances. The industry even has job titles for this role, such as "Night Auditor" or "Night Accountant." Similarly, internal auditors everywhere are always on the watch for such things as;
Internal auditors almost always report only to corporate officers or directors. Note that some organizations discourage their internal auditors from developing close personal ties, or social relationships with their colleagues—the people they audit. Independent Third-Party AuditorsBy contrast, independent third-party auditors, who write the formal opinions appearing below, are entirely outside the entity they audit. All parties therefore assume these people are free of influence from all levels of the group they are auditing. Independent auditors are usually certified accountants or financial specialists, working for themselves or consulting firms. They are therefore responsible only to their managers, regulators, governments, and the law. Note that third-party opinion is mandatory for financial results appearing in an Annual Report to Shareholders. And, this review is almost always mandatory when firms submit financial statements to regulators, governments, or lenders. Business Case Templates Because Sometimes You Need a Real Business Case! Info Buy Now $49
What Are Possible Auditor Opinions?Formal opinions from independent auditors fall into four categories. (1) Unqualified Opinion, (2) Qualified Opinion, (3) Adverse Opinion, and (4) Disclaimer of Opinion. First Possible Auditor OpinionUnqualified OpinionFirstly, the unqualified opinion is the best possible audit outcome. And, it is also by far the outcome that auditors report most often. By contrast, the other three possible results appear rarely. The term "unqualified" means that, in the auditor's opinion…
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Second Possible Auditor OpinionQualified OpinionSecondly, a qualified opinion means the auditor finds that reports conform to GAAP, except in just a few areas. For these areas, the auditor cannot assert conformance. The qualified opinion may result because:
In conclusion, auditors report the audit outcome as "qualified" when they are not comfortable calling it either "unqualified" or "adverse." With qualified opinions, auditors state specific reasons for their conclusions. Business Case Essentials. The Best Selling Case-Building Authority in Print! Info Buy Now $39 Third Possible Auditor OpinionAdverse OpinionThirdly, an "adverse" opinion means the auditor finds one or both of the following.
Before publishing an adverse opinion, auditors advise the firm's accountants and officers of such problems. And, auditors then work with them to correct problems, insofar as they can. They do this hoping to describe the outcome as "unqualified" or "qualified" opinion, instead of "adverse," if possible. When auditors do report an adverse opinion, they give specific reasons for the conclusion. As a result, auditors may point out specific accounting errors or departures from GAAP. In any case, an adverse opinion has severe consequences for the reporting entity. At a minimum, the conclusion ensures that investors, regulators, lenders, and governments will reject the reports. Also, if the audit reveals illegalities, corporate officers may be held personally accountable. Financial Modeling Pro Tutorial + Templates. The Living Model Makes Your Case! Info Buy Now $49 Fourth Possible Audit Outcome: No OpinionDisclaimer of OpinionFourthly, auditors may issue a disclaimer of opinion. Notice that disclaimer of opinion is not an opinion. Instead, it means that auditors choose not to render one. Auditors may issue a disclaimer of opinion when:
Auditors issue conclusions only when they are confident they can support the opinion. Otherwise, they submit a disclaimer of opinion. Business Case Guide. Everything You Need to Know About the Business Case! Info Buy Now $64 Example Auditor's StatementPricewaterhouseCoopers Statement for IBMIBM Annual Report 2013:The mandatory auditor's statement always appears on a page of its own, underscoring the auditor's independence from the company. IBM Report 2013:The required auditor's statement always appears on a page of its own, underscoring the auditor's independence from the company. Auditor opinions and statements are familiar to everyone who reads the Annual Report that public companies publish before their annual shareholder meeting. This report is mandatory, everywhere, because governments regulate the trading of ownership shares. Annual reports have relatively few mandatory components, but foremost among them are (1) Financial statements for the reporting period, and (2) the written opinion of an independent 3rd-party auditor. Auditors issue an "Auditor's Opinion" (or "Auditor's Statement," or "Auditor's Report") after they review the company's financial statements and—insofar as they are able—verify the accuracy of data and the judgments of the company accountants. The auditor's comments do not pass judgment on the company's financial performance or financial position. Even with the most favorable possible Auditor's opinion (an opinion of "Unqualified"), the report assures the public only that the auditor has examined the financial statements and is of the opinion that they present information fairly and in conformance with Generally Accepted Accounting Principles (GAAP). For example, at the top of this section is the full text of the statement from PricewaterhousCoopers (PWC) to the IBM Annual Report for 2013 filed February 2014). This statement essentially states the "Unqualified" opinion in the opening lines: "In our opinion, the accompanying Consolidated Financial Statements appearing on pages 78 through 146 present fairly, in all material respects, the financial position of International Business Machines Corporation and its subsidiaries at December 31, 2013 and 2012 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America." Auditor's statements such as this typically appear on a report page of their own, close to the presentation of company financial statements. Here, PWC did not explicitly classify their judgment by name, but the statement by PWC essentially describes the highest and most favorable outcome for an audit, an unqualified opinion. A favorable audit outcome is necessary for acceptance by regulatory authorities, lenders (banks, bondholders, and investors). What is the best outcome of an audit opinion?Unqualified Opinion. Firstly, the unqualified opinion is the best possible audit outcome. And, it is also by far the outcome that auditors report most often. By contrast, the other three possible results appear rarely.
Why is unqualified opinion good?Importance of Unqualified Opinion in Auditor's Report
An unqualified opinion in an audit report is even more important as it helps the shareholders and stakeholders to place reliance on the facts presented. It gives a sense of confidence and a positive note to the users of financial statements.
What are the 4 types of audit opinions?4 Different Types of Auditor Opinions. Clean Report or Unqualified Opinion.. Qualified Report or Qualified Opinion.. Disclaimer Report or Disclaimer of Opinion.. Adverse Audit Report or Adverse Opinion.. What is the strongest audit evidence?The strongest form of confirmation is the blank positive confirm. A blank positive confirm asks the third-party to report the client's asset balance back to the auditor without the prompt of the company's recorded balance. This guards against the third-party agreeing with the reported balance out of convenience.
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