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Auditor's Opinion, Statement and Report,

Accountant's Opinion Explained
Definitions and Meaning

Home > Encyclopedia > A > Auditors Opinion

© Business Encyclopedia, ISBN 978-1-929500-10-9. Updated 2017-02-23.

What is an auditor's opinion?
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 Unqualified is a clear "Thumbs Up." It
means audited statements (1) conform to GAAP and (2)
represent the company's accounts fairly.

The auditor's opinion does not judge the financial position of the
reporting entity. Nor does it otherwise interpret financial data.
Instead, the opinion simply answers two questions:
 Firstly, do the statements conform to Generally Accepted
Accounting Principles (GAAP)?

And, secondly, do they fairly represent the entity's financial

accounts?

Four names for the opinion

Note 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 Accountant's Opinion or Auditor's Opinion focuses on the

actual opinion, one of four possible outcomes described below.

The terms Statement or Report imply that the text includes the opinion, but also:

The responsibilities of auditors.

Responsibilities of directors and corporate officers.

The scope of coverage.

Four possible audit outcomes

Sections below further define and explain financial reporting audits. Four kinds of outcomes are covered:

Unqualified opinion Adverse opinion

Qualified opinion Disclaimer of opinion

Contents
What is an auditor's opinion?

Who performs the audit? And, who is responsible for the opinion?

What are the four possible auditor's opinions? 

1. Unqualified opinion 

2. Qualified opinion 

3. Adverse opinion 

4. Disclaimer from opinion

Who performs the audit? And, who is responsible for the opinion?
An Audit examines a report. Its purpose is to assess report veracity and accuracy. And, audits are led by auditors who 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 recognized expertise in the area under audit.
This is because the published opinion must speak with authority.

Two rules also apply universally for auditing:

Firstly, the auditor does not report to the person audited. The auditor, therefore, cannot receive discipline or reward from
this person.
 Secondly, the auditor's pay does not depend on the audit outcome. The auditor, therefore, has no incentive to choose one
opinion over another.

These rules, obviously, reinforce auditor impartiality.

Auditors are classified as either internal or external auditors.

Internal auditors report directly to very senior managers or directors.

External auditors are outside the entity's management hierarchy. They are therefore known also as independent or third
party auditors.

Internal Financial Audits

Directors and officers in many firms rely on internal financial audits. As a result, these are built into the firm's governance
structure.

Investor-owned hotels run financial audits nightly. They do this because they must be sure that managers 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;

Embezzlement. Inventory leakage.

Accounting fraud. Pilferage.

Theft. Reimbursement abuse.

Internal auditors are responsible only to corporate officers or directors.

Independent third party auditors

By contrast, independent third party auditors, who write the formal opinions described below, are completely outside the
audited entity. They are therefore assumed free of influence from any level of the entity.

Independent auditors are usually certified accountants or financial specialists, working for themselves or for consulting
firms. They are therefore responsible only to their own managers, regulators, governments, and the law.

Note especially that third party opinion is mandatory for financial results appearing in an Annual Report to Shareholders. And,
third party opinion is almost always required when firms submit financial statements to regulators, governments, or lenders.

What are four possible auditor's opinions?

Formal opinions from independent auditors fall into four categories.

1. Unqualified opinion

Firstly, the unqualified opinion is the best possible audit outcome. And, it is also by far the most frequently reported opinion.
By contrast, the other three outcomes are rarely issued.

The term "unqualified" means that the auditor has decided that:

Financial statements conform to Generally Accepted Accounting Principles (GAAP).

And, statements represent the entity's financial accounts fairly.

2. Qualified opinion

Secondly, 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:

 The report misstates or misclassifies accounting entries. For example, an expense that should appear above the gross
profit line appears wrongly below it. This leads to misleading gross profit figures.

There are limits on audit scope. This can mean, for instance, that auditors are denied access to certain financial data.

The auditor doubts the veracity of certain financial data.

The auditor is not fully confident that reports:

Comply with GAAP.

Represent the entity's accounts fairly.

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 the opinion.

3. Adverse opinion.

Thirdly, an adverse opinion means the auditor finds the following.

Statements do not fairly represent the entity's accounts.

And, the audited statements do not comply with GAAP.

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 opinion. As a result, auditors may point out
specific accounting errors or departures from GAAP.

In any case, an Adverse opinion has serious consequences for the reporting entity. At a minimum, the opinion ensures that
reports will be rejected by investors, regulators, lenders, and governments. In addition, if the audit reveals illegalities,
corporate officers may be held personally accountable.

4. Disclaimer of opinion

Fourthly, auditors may issue a disclaimer of opinion. Note especially that this is not an opinion. Instead, it simply says that
auditors choose not to issue an opinion.

Auditors may issue a disclaimer of opinion when:

They believe they cannot audit impartially. With the disclaimer, therefore, auditors recuse themselves.

The auditor's scope is limited. This occurs, for instance, when auditors cannot access certain financial data.

Auditors have other doubts about the reports. For example:

Reports may seem to violate accounting principles such as the matching concept or the conservatism principle.

Auditors may question the classification of certain revenues and expenses.

Some capitalized items probably should not have been capitalized.

They may question the way the entity applies rules such as the Lower of Cost or Market rule, or LIFO and FIFO rules
for inventory.

Auditors issue opinions only when they are confident the opinion is supportable. Otherwise, they issue a disclaimer of
opinion.

By Marty Schmidt . Copyright © 2004-2017.

Solution Matrix Ltd, Publisher. Find us on  Linkedin   Google+   Facebook

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