What Is an Auditor's Opinion?
An auditor's opinion is a certification that accompanies financial statements. It is based on an audit of the procedures and records used to produce the statements and delivers an opinion as to whether material misstatements exist in the financial statements. An auditor's opinion may also be called an accountant's opinion.
Understanding Auditor's Opinions
An auditor's opinion is presented in an auditor’s report. The audit report begins with an introductory section outlining the responsibility of management and the responsibility of the audit firm. The second section identifies the financial statements on which the auditor's opinion is given. A third section outlines the auditor’s opinion on the financial statements. Although it is not found in all audit reports, a fourth section may be presented as further explanation regarding a qualified opinion or an adverse opinion.
For audits of companies in the United States, the opinion may be an unqualified opinion in accordance with generally accepted accounting principles (GAAP), a qualified opinion, or an adverse opinion. The audit is performed by an accountant who is independent of the company being audited.
- An auditor's opinion is made based on an audit of the procedures and records used to produce financial records or statements.
- There are four different types of auditor's opinions.
- An auditor's opinion is presented in an auditor's report, which includes an introductory section, a section that identifies financial statements in question, another section that outlines the auditor’s opinion on of those financial statements, and an optional fourth section that may augment information or provide additional relevant information.
Types of Audit Opinions
An unqualified opinion is also known as a clean opinion. The auditor reports an unqualified opinion if the financial statements are presumed to be free from material misstatements. In addition, an unqualified opinion is given over the internal controls of an entity if management has claimed responsibility for its establishment and maintenance, and the auditor has performed fieldwork to test its effectiveness.
A qualified opinion is given when a company’s financial records have not followed GAAP in all financial transactions. Although the wording of a qualified opinion is very similar to an unqualified opinion, the auditor provides an additional paragraph including deviations from GAAP in the financial statements and points out why the auditor report is not unqualified. A qualified opinion may be given due to either a limitation in the scope of the audit or an accounting method that did not follow GAAP. However, the deviation from GAAP is not pervasive and does not misstate the financial position of the company as a whole.
The most unfavorable opinion a business may receive is an adverse opinion. An adverse opinion indicates financial records are not in accordance to GAAP and are grossly misstated. An adverse opinion may be an indicator of fraud, and public entities that receive an adverse opinion are forced to correct their financial statements and have the financial statements re-audited. Investors, lenders, and other financial institutions do not typically accept financial statements with adverse opinions as part of their debt covenants.
Disclaimer of Opinion
In the event the auditor is unable to complete the audit report due to absence of financial records or insufficient cooperation from management, the auditor issues a disclaimer of opinion. This is an indication that no opinion over the financial statements was able to be determined. A disclaimer of opinion is not an opinion itself.