Five different auditor’s opinions, what do they mean?
The auditor’s opinion can be one of five different opinions: unqualified, unqualified with explanatory language, qualified, adverse, or disclaimer of opinion.
The unqualified opinion is regarded as a clean bill of health, where the auditor makes no exceptions and does not include qualifications in the report.
An unqualified opinion should only be made when the independent auditor deems that the financial statements were made in accordance with GAAP, that GAAP were applied in a consistent basis, and that the statements include all of the information necessary to make the statements accurate. If circumstances require an auditor to add clarifying language to the standard report, the opinion is not considered qualified but rather unqualified with explanatory language. Adding the additional language is not regarded as a qualification since the inclusion of explanatory language serves to advise the readers or users of the statements.
Auditors add explanatory language to an unqualified opinion for the following reasons:
• To emphasize a particular matter or circumstance
• To justify a departure from GAAP
• To highlight an uncertainty that could have a significant effect on the financial statements
For example, the auditor may want to draw attention to the fact that the organization is facing significant litigation, or has a trend of losing money from operations. The auditor may include explanatory language if there is a question about the quality of the records or supporting documentation.
Qualified opinions may be broadly classified into two categories—qualifications that relate to a limitation of the examination, and qualifications with respect to the exceptions in presentation in accordance with GAAP. The limitation or exception must be significant but not so material as to overshadow an overall opinion of the financial statements. The qualified reports include a separate explanatory paragraph before the opinion paragraph disclosing the reasons for the qualification. The qualified opinion should be viewed as a warning or alert to individuals using the financial statements.
An adverse opinion is the opposite of an unqualified opinion; it is an opinion that the financial statements do not present fairly the financial position, results of operations, and cash flow of the company, in conformity with GAAP. An auditor should express an adverse opinion if the statements are so lacking in fairness that a qualified opinion would not be warning enough. Whenever the auditor issues an adverse opinion, he or she should disclose in a separate paragraph of the report the reasons for the adverse opinion. The paragraph should also discuss the principal effects the circumstances triggering the adverse opinion have on the interpretation of the financial statements.
A disclaimer of opinion is basically the same as no opinion. This type of report results from very significant limitations in the scope of the auditors’ examination or limitations that are imposed by the client. If the auditor the importance of a good audit cannot evaluate the fairness of the statements, he or she should issue a disclaimer of opinion.
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