What Is an Auditor's Report?

The auditor's report is a written letter from the auditor containing the opinion of whether a company's financial statements comply with generally accepted accounting principles (GAAP). The independent and external audit report is typically published with the company's annual report. The auditor's report is important because banks and creditors require an audit of a company's financial statements before lending to them. In this article, we explain what goes into an auditor's report as well as review an example of an audit report.

How an Auditor's Report Works

An auditor's report is a written letter attached to a company's financial statements that express its opinion on a company's compliance with standard accounting practices. The auditor's report is required to be filed with a public company's financial statements when reporting earnings to the Securities and Exchange Commission (SEC). However, an auditor's report is not an evaluation of whether a company is a good investment. Also, the audit report is not an analysis of the company's earnings performance for the period. Instead, the report is merely a measure of the reliability of the financial statements.

Key Takeaways

  • The auditor's report is a document containing the auditor's opinion of whether a company's financial statements comply with GAAP.
  • The audit report is important because banks, creditors, and regulators require an audit of a company's financial statements.
  • A clean audit report means a company followed accounting standards while an unqualified report means there might be errors.
  • An adverse report means that the financial statements might have had discrepancies, misrepresentations, and didn't adhere to GAAP.

The Components of an Auditor's Report

The auditor's letter follows a standard format, as established by generally accepted auditing standards (GAAS). A report usually consists of three paragraphs.

  • The first paragraph states the responsibilities of the auditor and directors.
  • The second paragraph contains the scope, stating that a set of standard accounting practices was the guide.
  • The third paragraph contains the auditor's opinion.

An additional paragraph may inform the investor of the results of a separate audit on another function of the entity. The investor will key in on the third paragraph, where the opinion is stated.

The type of report issued will be dependent on the findings by the auditor. Below are the most common types of reports issued for companies.

Clean or Unqualified Report

A clean report means that the company's financial records are correct and conform to the guidelines set out by GAAP. A majority of audits end in unqualified, or clean, opinions.

Qualified Opinion

A qualified opinion means that although a company didn't follow the proper accounting standards, the company didn't do anything wrong. For example, a mistake might have been made in calculating operating expenses or profit. Auditors typically state the specific reasons and areas where the issues are present so that the company can fix them.

Adverse Opinion

An adverse opinion means that the auditor found that not only did the company not follow accounting guidelines, but there were discrepancies in the financials. An adverse opinion indicates that the auditor might have suspicions of material misstatements or misrepresentations in the financial statements, but does not have enough evidence to clearly express that opinion. An adverse opinion is the worst possible outcome for a company and can have a lasting impact and legal ramifications if not corrected.

Disclaimer of Opinion

A disclaimer of opinion means that for some reason, the auditor couldn't complete the audit or chooses not to provide an opinion on the company. Examples can include when an auditor can't be impartial or wasn't allowed access to certain financial information.

Regulators and investors will reject a company's financial statements following an adverse opinion from an auditor. Also, if illegal activity exists, corporate officers might face criminal charges.

Example of an Auditor's Report

Excerpts from the audit report by Deloitte & Touche LLP for Starbucks Corporation, dated November 17, 2017:

Paragraph 1

"We have audited the accompanying consolidated balance sheets of Starbucks Corporation and subsidiaries...and related consolidated statements of earnings, comprehensive income, equity, and cash flows. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits."

Paragraph 2

"We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements."

Paragraph 3

"In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Starbucks Corporation and subsidiaries...in conformity with accounting principles generally accepted in the United States of America."

Paragraph 4

"We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board, [and] expressed an unqualified opinion on the Company's internal control over financial reporting."