The auditors issue an unqualified Audit Opinion to notify that the audit has successfully been completed. To the best of the auditors ‘ knowledge, there are no material misstatements in the company’s financial statements.
Unqualified Audit Report is issued after the stringent audit process, and it implies that there are no questionable misstatements in the financial statements. Therefore, the financial statements can be relied upon since they depict the company’s actual financial position.
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 gruesome work behind the audit process. The main rationale here is to ensure that auditors can present a free and fair view regarding the company’s operations, which can help investors make their decisions in an informed manner.
All publicly listed companies are supposed to undergo financial audits at the year-ends. 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.
However, the primitive goal of auditors is to give their opinion regarding the company’s financial statements 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 companies issue. From the company’s perspective, this report tends to be highly important, primarily because it is directly correlated with the trust that investors place in the company. There are 4 types of audit opinions that auditors issue.
Types of Audit Opinion
As mentioned earlier, there are 4 main types of audit opinions that auditors of the company issue. They are as follows:
- Unqualified Report: Unqualified Report is the most common type of audit opinion that is issued by auditors. This report is testament to the fact 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 is issued by the auditors.
- Qualified Report: Qualified 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 qualified 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 financial status of the company. 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 by far the worst opinion that an organization can get in the audit report. This opinion is issued in cases where the auditors are totally dissatisfied with the company, and their 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 Unqualified 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 errors or inconsistencies in the financial statements.
Therefore, if they cannot find any errors or inconsistencies, they are said to be ‘unqualified’ 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 Unqualified Audit Opinion implies that the financial statements are not materially misstated, and they present a true and fair view similar to the actual financial position of the organization.
The unqualified audit report is the most commonly issued audit report. It is also referred to as a ‘clean sheet’ because it gives a heads up to shareholders (and other external stakeholders) that the organization is actually compliant with the required laws and legislation. 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.
Unqualified Audit Opinion is most commonly issued because almost all public companies follow a strict protocol in ensuring and determining that they are properly compliant with the accounting bodies and the Securities Exchange Commission of the given country.
However, it must be noted that Unqualified 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 Unqualified Audit Report issued?
An unqualified Audit Report tends to be the best option from the perspective of the organization. They work all year-round in order to make sure that auditors are able to give a clean sheet based on which they can continue to maintain their reputation in the market.
However, from an auditor’s perspective, a few areas are accounted for before issuing unqualified 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 on the extent to which 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 to make sure that auditors are able to get reasonably assured regarding the company’s financial statements.