Audit Report Qualified Opinion

The company's auditor gives a qualified opinion in the audit report if it is found that the company's financial statements are presented fairly, except in specific areas. It is just one notch below an Unqualified Opinion (i.e., a Clean opinion).

It is issued in those cases where the Auditor feels that the financial statement is not prepared following the rules laid down under GAAP/IFRS (Generally Accepted Accounting Principles/International Financial Reporting Standards), whichever is applicable. Such an opinion is very important because financial statements are important documents that provide information to stakeholders. Therefore, they should exhibit correct and relevant financial data.  

Every financial statement of all companies needs to be verified by an auditor who has the responsibility of ensuring that the statements and information displayed on them are true and fair in all respects. They have the necessary knowledge and experience to understand and detect deviations from the actual data and accounting rules, which may prove to be detrimental to the organization.

In case of qualified opinion in audit report, it is important to understand that the financial information revealed within the statements like income statements, cash flow statements, balance sheets, and statements of changes in equity are used widely by both management and stakeholders to understand the risk and strength of the business, its market value, future plans and opportunities and so on. In other words, these are used by investors and analysts as well as the company to make important financial decisions that may decide its future growth potential.

The Audit report qualified opinion is almost similar to an Unqualified audit report Opinion with the only exception that certain records about Financial Statements, as per the advice of the Auditor, are not in conformity to the standards as laid down in GAAP/IFRS without giving any indication of misrepresentation of facts and figures. Whenever an Auditor gives such an Unqualified Opinion, they will highlight the reasons for the same in a separate/ additional paragraph.

Some of the areas which can lead to Auditors expressing a qualified opinion in the Audit Report are:

• If the financial statements make an exception to the accounting principles such as deviation from Generally Accepted Accounting Principles (GAAP) or stated disclosures are incomplete in nature, the Auditor may issue an Audit report qualified opinion and explain such exceptions in the Audit Report.
• In cases where there is disagreement in the possible treatment of certain items between the Management and the Auditor, it may also take the form of the wrong classification of accounting entries. (Example certain expenses are classified by the business as Capital Expenses and as such is not shown in the Profit and Loss Account but directly capitalized in the Balance Sheet, however, if the Auditor has a different view on the same and is not satisfied with the classification of such expenses, may issue an Unqualified audit report Opinion and provide the reason for the difference in opinion in a separate paragraph in Audit Report.
• In cases where there is a limitation in work undertaken by the Auditor on account of insufficient information or incomplete reports furnished by the management to verify certain business transactions;
• In cases where the Auditors doubts the genuineness of certain financial data reported by the business;

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1. Auditing I: Conceptual Foundations of Auditing
2. Auditing II: The Practice of Auditing

Auditors come in with a huge responsibility to ensure that the information revealed does not lead to misstatement and misguidance. A qualified opinion on audit report is the one that the auditor gives stating that the statements are not as per the rules or there is no sufficient evidence of a particular transaction, all of which are not pervasive. Such details may affect the use of those documents. Such an opinion may also be due to the lack of information disclosed in the footnotes.

Let’s understand the concept of qualified opinion on audit report with the help of a few examples, which can result in an Auditor expressing a Qualified Opinion.

Under-Reporting of Provisions

Rathi and Associates conducted Audit of ABC International as per the relevant provision of the Act and observed that the Sundry Debtors/Accounts Receivables reported by ABC International includes an amount of $40000 which is due from an entity which has ceased its operations and the debt is unsecured, and the company doesn't have any security to liquidate and realize its dues. Accordingly, ABC International must make a complete provision of $40000 in its Profit and Loss Account and reduce its Profit by the same amount before adjusting for tax.

As such, in my opinion (Auditor Remark), except for the matter described above as the basis for an Audit report qualified opinion, the financial statements present a true and fair view of the financial position of ABC International.

Incorrect Treatment of Business Inventory

Franklin and Associates conducted Audit of Bata International and Observed that the company had reported Inventories on its Balance Sheet at Cost instead of the ideal practice of stating at lower of Cost or Net Realizable Value as per the relevant Accounting Standard pertaining to Valuation of Inventories. As per the records shared by Bata International if such Inventories were recorded at lower of Cost or Net Realizable Value would have resulted in Bata International Gross Profit falling by $20000 and Income Tax Expenses reduced by $2000 and Net Profit down by $18000 respectively.

As such, in my opinion (Auditor Remark), except for the incorrect inventory valuation treatment above as the basis for an Audit report qualified opinion, the financial statements present a true and fair view of the financial position of Bata International.

Insufficient Information Furnished

Clark and Associates conducted Audit of Moon Pharmaceuticals Limited, which reported revenues of $250000, out of which $50000 were cash sales. Auditors were unable to factually satisfy themselves about the cash sales recorded by the company due to inadequate systems of Internal Control and recording of such Cash Sales. As such, it is impossible to certify that the recorded revenues are free from material error relating to the Overstatement of Revenues.

As such, in my opinion (Auditor Remark), except for the matter described above as the basis for an audit report qualified opinion, the financial statements present a true and fair view of the financial position of Moon Pharmaceuticals.

Thus, we can conclude that such an independent auditor's report qualified opinion is a case where the auditor is not able to identify or gather sufficient proof to support a particular adjustment or transaction or does not follow the rules given in the accounting standards. Lack of verification and support leads to improper disclosure and uncertainty in the process.

It is essential to note that this opinion is mentioned in the third and final section of the report. This section points out to the position of the accounting statements and internal control procedures. This kind of opinion shows that the auditor is not able to verify the details to the fullest extent and hence, not able to complete the report properly.

It is necessary to understand that both the opinions mentioned in the heading above are related to what the auditor says after they scrutinize the entire financial statement of a company. But there are some points of differences between them, as follows:

• Audit report qualified opinion remark can be on account of multiple reasons and is a sign for all stakeholders to understand that the quality of a business is deteriorating, and some parts of the financial statements are not found to be transparent by the Auditor. Whenever an Auditor provides a Qualified Audit report, it is supported by the reasons for the same, and it is the responsibility of stakeholders of the business and Analyst and other investors to go through the same and understand the severity of such an opinion and make an informed decision.
• While giving the opinion the difference also lies in the words used by the auditor. In case of the independent auditor's report qualified opinion, the auditor directly and clearly states that the information “except for the following transactions, gives a true and fair view” whereas in case of the latter, the auditor will state that the information gives a “true and fair view”.
• From the above point it is clear that for the former, the discrepancy is related to not all but some parts of the documents or some adjustments, that may affect the fairness of the information. But the latter specifies that all information is proper and stated as per the rules and guidelines of the accounting standards.
• The former is not favourably accepted by investors, shareholders, analysts and other stakeholders since it points out to some sort of discrepancy, or the company is not in good health. But the latter is favorably accepted by all stakeholders since it clearly reveals the sound financial health of the company in a transparent manner.
• The former reduces the credibility of the business in the market, whereas the latter increases the credibility of the business.
• Every organization should strive to attain the latter from the auditor in the audit report, not the former.

Thus, the above are some important differences between the two types of opinion

This has been a guide to what is Audit Report Qualified Opinion. We explain it with some examples & differences with Audit Report Unqualified Opinion. You can learn more about financing from the following articles -

• Audit Report Format
• What are the Audited Financial Statements?
• Types of Audit Report
• Audit Assertions