In the United States, publicly listed companies are required to have an audit of their financial statements. After collecting substantial information, an external auditor issues a statement or an opinion as regards the quality or integrity of the company’s reported financial information.
Audited financial statements can be used in improving internal controls or in assessing the financial position or performance of an entity. Therefore, as a CFO, it’s important to understand the audit opinions provided in the different types of audit reports.
The Types of Audit Reports
Here are the four types of audit reports that are given by external auditors:
1. Unqualified Opinion
An unqualified opinion indicates that the information presented in a company’s financial report is clean. As in a medical patient’s clean bill of health, an unqualified opinion shows that the audited financial statements can be presumed to be free from misstatements.
2. Qualified Opinion
An opinion rendered in a qualified audit report is similar to an unqualified opinion; however, the auditing body cannot express an unqualified opinion for several reasons. One reason could be that the company did not present its financial records in accordance with generally acceptable accounting principles (GAAP).
3. Disclaimer Opinion
Auditors give a disclaimer when they are unable to express a definite opinion. This can be due to the lack of properly maintained financial records or the absence or insufficient support from the management. For instance, an auditor may not have had the opportunity to fulfill tasks that they deem to be crucial to the audit, such as observing operational procedures or reviewing particular procedures.
4. Adverse Opinion
When auditors issue an adverse opinion, it indicates that there has been a gross misstatement and, possibly, fraud, in the preparation of the company’s financial records. An adverse opinion shows that the company’s records have not been prepared in accordance with GAAP. Financial statements with adverse audit opinions are typically rejected by financial institutions or investors.
What happens during an audit?
During the statutory audit, the auditor has to review the processes and procedures by which the financial information was prepared. That is, the auditor has to check whether the preparation of the company’s financial reports is aligned with GAAP or other applicable reporting frameworks.
Statutory audits underscore the importance of financial reporting in corporate transparency. By ensuring financial transparency, entities can help establish a good relationship with their investors and the public.
In preparing for an audit, it's important that you have set internal controls and policies that are monitored and reviewed by your internal audit team. Do you want to learn more about the steps you need to take to prepare for it? Read our primer on D&V’s Audit Support Group and find out how our experts can guide you through the key steps.