Auditor's Opinion

An auditor’s opinion is a statement presented by an independent auditor revealing the authenticity of a company’s financial statements. Since it bespeaks the fairness of corporate financial reporting, stakeholders of the company rely on it to make important financing decisions. A positive audit opinion reinforces the relationship between the company and its stakeholders.

Audit opinion is a pertinent section of an audit report presenting the financial condition of a firm from its auditor’s perspective. It reassures that the statements are prepared in accordance with the rules and regulations of the applicable financial reporting framework. Audit opinion is of four types, i.e., unqualified audit opinion, qualified audit opinion, adverse audit opinion, and disclaimer.

• An auditor’s opinion is a formal certification of the correctness and fairness of an entity’s financial statements by an independent auditor. It ensures corporate accounting transparency. 
• Auditors use their professional judgment and legal considerations to form an accurate opinion helping foster relations between the entity and investors. 
• There are four types of auditor’s opinion, i.e., Unqualified, Qualified, Adverse, and Disclaimer. 
• Auditors check whether an organization's operational controls and accounting policies conform to the GAAP (Generally Accepted Accounting Principles). 

A financial audit process is an assessment of the financial affairs of a company. It allows an independent accountant, usually qualified and certified, to scrutinize its financial statements and express an opinion on their accuracy and integrity. The auditor's opinion is communicated through an audit report.

An audit report is the final product of the audit process. It communicates multiple financial aspects of the business, the most important being the auditor’s opinion. Investors rely on the audit opinion to know if they can trust a company's financial statements to make decisions.

The annual audit procedure begins after the business administration offers accounting information to the auditing committee. Next, the auditors examine if the company employs GAAP (Generally Accepted Accounting Principles) to produce the financial details. They also evaluate the methodologies and approaches used by a firm.

After that, they ensure that the financial records are free from material misstatement, error, or fraud. Then, they form an opinion on the company's accounting statements based on the audit evidence gathered during the audit process.

Finally, they draft the audit opinion and affix it in the audit report. The audit opinion section typically encompasses four parts. It includes an introductory paragraph, a description of the management's responsibility, an explanation of the auditor's duties, and an opinion paragraph.

The auditor is essentially an individual unassociated with the firm being audited to guarantee a transparent audit process.  Hence, audit opinion reflects an unbiased perspective on an entity's financial reporting.

It informs the general public and prospective shareholders about an entity’s honesty, responsibility, and authenticity. This coerces the firm to review and modify its financial reporting techniques to project clarity.

Hence, the companies must ensure the effectiveness and constant analysis of their accounting policies and operational controls to get unqualified audit opinions. 

There are four crucial audit opinion types:

#1 - Unqualified audit opinion

Unqualified audit opinion expresses the satisfaction of an auditor with the entity's financial reporting. It means the company has prepared and presented its accounting records fairly and accurately in compliance with the GAAP and other applicable laws.

Most companies seek such an opinion as a validation stamp that helps the firm bring more investors and moneylenders. Regarded as a clean report, it is devoid of any unpleasant remarks or disclaimer about the audit method. 

#2 - Qualified audit opinion

Qualified audit opinion states unverifiable details and any limitations on the scope of work done by an auditor. This indicates an auditor’s reluctance to issue an unqualified opinion due to lack of audit evidence, issues with GAAP compliance (non-pervasive), or restrictions on the audit process.

Resultantly, a qualified opinion affirms the fairness of the accounting records with some exceptions. Hence, the opinion can be considered neutral, clearly citing the auditor’s concerns. Both unqualified and qualified opinion reports are written the same way, except the latter includes reasons behind an unclean report.

#3 - Adverse audit opinion

An adverse opinion specifies an extremely suspicious accounting statement that can diminish the company’s market position, sometimes causing a lawsuit. Auditors who spot extensive material misstatements and are fully dissatisfied with the accounting statements have to present such a viewpoint. 

The high level of misrepresentation may also result in fraudulent activities. Needlessly, financers and investors view this as a red flag avoiding any commercial activity with the audited entity. 

#4 - Disclaimer

Disclaimer happens when there is no audit opinion due to lack of accounting documents or non-cooperation of the client’s executive team. For example, auditors avoid providing views when their questions remain unanswered or are acknowledged improperly. 

They may fail to gather sufficient evidence to back excellent financial statistics or be incapable of identifying the actual nature of some dealings. So, auditors who cannot scrutinize operational processes or assess specific techniques prefer to issue a disclaimer. 

Here is a snapshot of the audit report of Tesla Inc. for the year 2020.  The auditor is PricewaterCoopers LLP (PWC). As evident, the auditor issued an unqualified audit opinion on Tesla’s financial statements assuring its accuracy and fairness.

A news snippet from Reuters discusses the fourth audit failure of the US Pentagon. The department’s Chief Financial Officer (CFO) mentioned the firm’s struggle with systems and accounting issues though he stated its consistent progress in the direction of success. 

Nearly 1200 auditors evaluated the record-keeping procedures and systems globally on military personnel, property, and weapons systems. This occurred on 1069 virtual visits and 278 site visits. 

The audit has substantially helped US Pentagon polish its controls and systems with time. Also, it has assisted the Department of Defense to discover the misplaced inventory and save bucks. 

This has been a guide to Auditor's Opinion & its Definition. Here we discuss the auditor's opinion on financial statements along with types & examples. You may also have a look at the following articles to learn more –

• Audit Program
• Independent Auditor Report
• Audit Test