The auditor’s report appears on the first page of the audited financial statements. One should not overlook that essential aspect of accounting. It includes the audit opinion. Audit opinions state whether the financial statements are presented accurately in all material ways, comply with Generally Accepted Accounting Principles (GAAP), and are free of substantial misstatement.

There are four different categories of audit opinions, ranging from the most desirable to the least favorable.

Four levels of audit opinions

1. Unqualified:The most prevalent type of viewpoint is “unqualified.” The auditor certifies that the company’s financial status, position, and financial statements accurately portray the operations.

2. Qualified:If the financial statements appear to have a minor divergence from GAAP but are otherwise fair, the auditor issues a qualified opinion. For example, if a borrower underestimates a contingency reserve, the auditor will “qualify” their view. Still, the exception will not affect the rest of the financial statements.

If the company’s management limits the scope of audit procedures, qualified views are also issued. For example, suppose you refused the auditor access to year-end inventory counts owing to safety concerns during the COVID-19 outbreak. In that case, you might have received a qualified opinion.

3. Adverse:There are significant exceptions to GAAP that affect the financial statements when an auditor delivers an unfavorable opinion. The auditor indicates that the financial statements are not presented fairly in this instance. An adverse opinion letter usually outlines these exceptions.

4. Disclaimer:A disclaimer opinion is even more concerning to lenders and investors. A “disclosure” is when an auditor quits in the middle of an audit. Significant scope constraints, serious questions regarding the company’s going-concern status, and uncertainties inside the subject company are all possible reasons for disclaimers. A disclaimer opinion letter briefly outlines the auditor’s reasons for throwing in the towel.

Beyond the opinion

Auditors’ reports for public companies must also include the discussion of so-called “critical audit matters” (CAMs). These are, in essence, the most challenging concerns that surfaced throughout the audit. The CAMs are unique to the engagement and audit year. As a result, they should fluctuate from year to year.

This requirement is a significant departure from the decades-old pass-fail audit opinion system. Its purpose is to provide stakeholders with more information about the company’s disclosures and the auditor’s work when providing an unqualified opinion. For further details on audit views, please contact our RRBB accountants and advisors.

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