Finance

What Are The Different Types Of Audit Opinions?

Often people come across audit reports and the opinions given in them as complex and hard to understand. One of the reasons for its complexity is that auditors need to make various assumptions in finalizing reports which are subjective in nature. The auditors make different types of audit opinions regarding the company’s financial status to investors which in turn provides a picture of the company’s financial performance in a given fiscal year. Based on the different types of audit opinions given by the auditors, the investors and financial institutions take their decisions with respect to investment in the company.

This article provides the meaning of the audit opinion and the characteristics of different types of audit opinions given by the auditors after conducting an audit.  

What Is An Audit Opinion?  

The formal statement made by an auditor on the financial statements of its clients is called audit opinion. There are different types of audit opinions such as:

• Unqualified opinion providing clean report
• Qualified opinion providing qualified report
• Disclaimer of opinion providing disclaimer report
• Adverse opinion providing adverse audit report

What Are The Different Types Of Audit Opinions?  

Following are four major types of audit opinions:

1. Unqualified opinion: One of the most common types of audit opinions which the auditor’s give most often is the unqualified audit opinion. This unqualified opinion is considered as a clean report from the auditor’s end. This type of audit opinion is what most of the companies wish to receive from their auditor. As the name goes, an unqualified audit opinion is one where the auditor does not give any adverse comment and the audit report is bereft of any disclaimers about any clause or regarding the audit process. An unqualified audit opinion is an indicator that the auditor is satisfied with the company’s financial reporting. Moreover, the auditor also believes that the company’s financial operations are in consonance with the applicable rules and regulations and principles of corporate governance. An unqualified audit opinion is perceived by the company, its auditors and especially its investors and public to be free from any material misstatements.    

• Qualified opinion: Where the financial transactions of the company or any of its specific processes are such that do not evoke confidence from the auditor’s end and such reasons do not allow the auditor to issue a clean and unqualified report, then in such cases the auditor issues a qualified opinion. Since an unqualified opinion projects a negative opinion about the company regarding its financial status, investors in general do not find such types of audit opinion to be acceptable. A qualified opinion is written by the auditor similar to that of an unqualified opinion, only difference being that the auditor submits the reasons which prevent them to submit an unqualified opinion.

One of the most common reasons for the auditor’s to provide an unqualified opinion is that the company failed to present its financial statements in accordance with the Generally Accepted Accounting Principles (GAAP)^[1].

• Disclaimer of opinion: A situation where the auditor’s try to distance themselves from giving any statement at all regarding the financial services of the company, then the auditor is said to have issued a disclaimer of opinion report. There can be a number of reasons behind the decision of the auditor to issue a disclaimer of opinion report. Some of the reasons are:
• The auditors are of the opinion that the company did not allow them to conduct a thorough audit of the company’s financial statements; or
• The auditor’s did not get proper explanations to the questions posed by them during the audit; or
• The auditor’s were unable to decipher the correct nature of the transactions; or
• The auditors were unable to secure enough evidence to meet the standards of good financial reporting; or
• The auditors were not given an ample opportunity to observe operational procedures or to review a particular procedure

All the above reasons prevent the auditors from expressing a definite opinion which forces them to come out with a disclaimer of opinion report. The image of these types of audit opinions is not considered attractive for the investors instead it portrays a negative image in the minds of the investors regarding the functioning of the company.    

• Adverse opinion releasing adverse audit report: Adverse opinion also features among the different types of audit opinion. Such kind of the opinion is released in the following situations:
• Where the auditors are not satisfied with the financial statements of the company; or
• Where the auditors discover a high level of material misstatements or irregularities.

This type of audit opinion gives rise to a situation where both the regulatory authorities and the investor start to mistrust the financial reports of the company.

An adverse audit opinion is considered to be a big red flag for the future endeavours of the company and is an indicator that the financial statement of the company has gross irregularities and the also a potential for fraud. Adverse opinion also points to the fact that the financial statements of the company have not been prepared in consonance with GAAP.

There is greater probability that the financial institutions and investors of the company may not want to engage with doing any business with the company in the future.

These types of audit opinions are used by the auditors to alert the financial institutions and the public about the transparency, reliability and accountability of the companies. These statements are also used as a pressure tactic in order to pressurise the companies to align their financial reporting practices with the best practices and pay close attention to accuracy. Since these adverse opinion reports alerts the public and other stakeholder, they are highly valued by them.

Conclusion 

Having gone through the characteristics of the different types of audit opinions, the company needs to ensure that there is efficient management of the audit processes and synthesise it with the modernised approach. This allows a company to stay ahead with the emerging risks.      

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