After the case of Enron and WorldCom, investor confidence in public market investments took a serious hit.
In order to remedy this, there have been efforts to restore investor confidence, by increasing the scope of auditors, thereby placing a higher responsibility on the shoulders.
Auditors today have more responsibility when it comes to external audits, and they are supposed to ensure that their opinion reflects the gruesome work behind the audit process.
The main rationale here is to ensure that auditors are able to present a free and fair view regarding the operations of the company, which can help investors make their decisions in an informed manner.
All publicly listed companies are supposed to undergo financial audits at the year-end. The independent auditor is hired for a period no longer than 5 years, during which the auditor is supposed to issue an opinion regarding the company’s financial position.
The primitive goal of auditors, however, is to give their opinion regarding the financial statements of the company, and if they are materially misstated or not.
This audit report tends to be a reference point for external stakeholders since it gives much-needed insight into the extent to which the company’s financial statements can be relied upon.
There are several different types of audit reports that audit firms issue. From the perspective of the company, this report tends to be highly important, primarily because of the fact that it is directly correlated with the trust that investors place in the company.
There are four types of audit opinions that auditors issue.
Types of Audit Opinion
As mentioned earlier, there are four main types of audit opinions that auditors of the company issue. They are as follows:
- Unmodified Report: The unmodified Report is the most common audit opinion that auditors issue. This report is a testament that the auditors were not able to find any evidence of material misstatement in the financial statements. In other words, it implies that the financial statements are true and accurate, to the best of the knowledge of the auditors. This is the most favorable report that the auditor issued.
- Modified Report: Modified Report is an audit opinion that extends the opinion that the auditors found significant material misstatements in the financial statements of the company. This is perhaps the most catastrophic audit opinion that can be issued to the company. This is because it leads to investor distrust. Investors are highly unlikely to continue investing in the company once they find out that they have been issued a modified report by the auditors.
- Disclaimer of Opinion: Disclaimer of Opinion is issued by the auditors in instances where they distance themselves from presenting an opinion on the company’s financial status. This opinion is often issued in cases where the auditors are unable to find reasonable evidence that can help them gather substantial evidence, based on which they could have issued an opinion on the accuracy of the financial statements of the company.
- Adverse Opinion: This is the worst opinion an organization can get in the audit report. This opinion is issued in cases where the auditors are totally dissatisfied with the company and its operations. In this aspect, it directly results in a very bad repute for the company, because it implies that the company is not a safe investment for the investors.
What is Meant by Unmodified Audit Report?
The main objective of auditors during a financial audit is to figure out if the financial statements have been materially misstated or not.
They check for this, using audit procedures. Coupled with professional skepticism, their task is to find out errors, or inconsistencies in the financial statements.
Therefore, if they are unable to find out any errors, or inconsistencies, they are said to be ‘unmodified’ in finding material misstatements in the financial statements.
A similar concept goes into the audit report, where they issue their opinion saying that they were unable to find any concrete evidence that would support the claim that the financial statements were, in fact, materially misstated.
Hence, it can be seen that an Unmodified Audit Opinion implies that the financial statements are not materially misstated. They present a true and fair view similar to the actual financial position of the organization.
The unmodified audit report is the most commonly issued audit report. It is also referred to as a ‘clean opinion’ because it gives a heads up to shareholders (and other external stakeholders) that the organization in context is actually compliant with the required laws and legislations.
Therefore, having this particular audit report implies that the company is a safe investment, and hence the investor confidence marginally increases as a result of that.
Unmodified Audit Opinion is most commonly issued because almost all public companies follow a strict protocol in terms of ensuring and determining that they are properly compliant with the accounting bodies, as well as the Securities Exchange Commission of the given country.
However, it must be noted that Unmodified Audit Opinions do not mean that there is a 100% guarantee that there is nothing wrong with the company, and it is foolproof.
In fact, it means that the auditors have not been able to find any concrete evidence that would suggest any malpractice within the company.
In What Circumstances is an Unmodified Audit Report issued?
An unmodified Audit Report tends to be the best option from the perspective of the organizations. They work all year-round to make sure that auditors can give a clean opinion based on which they can continue to maintain their reputation in the market.
However, from an auditor’s perspective, there are a few areas that are accounted for before issuing unmodified audit reports. They include the following:
- Compliance related to accounting bodies: Auditors should ensure that companies are able to comply with the accounting standards set by the accounting bodies. In this regard, it is also important to ensure that the financial statements have been prepared with the all-compliance-related policies in place, so that there is no confusion pertaining to accounting-related bodies.
- Internal Control: Internal Control tends to be one of the most important indicators that reflect how companies have a safe and secure system in place. The main rationale in this regard is to ensure that there are no policies in place that create space for cash embezzlement or fraud within the company. External auditors tend to inspect the level of internal control since this is a testament to lesser chances of fraud within the company.
- Financial Statements and Materiality: Materiality tends to be a very important concept when it comes to auditing financial statements. Auditors are supposed to ensure that they are able to identify any material misstatements in the financial statements. The main objective here is to gather substantial evidence that can help them reach a conclusion that the financial statements are not materially misstated and hence, can be relied upon by the decision-makers of the company.
Therefore, it can be seen that there are quite a few areas that auditors need to be sure about when it comes to issuing an opinion regarding the company.
The audit procedures and tasks are carried out in an extensive manner in order to make sure that auditors are able to get reasonably assured regarding the financial statements of the company.