Types of Auditing Reports
An audit is an independent review of an entity’s financial statements. Public accountants conduct audits and examine the financial reports and supporting records. The objective of an audit is to enable the auditor to provide an opinion on the fairness and reliability of the financial statements.
The independent certified public accounting firm employed by the Board of Directors is responsible for seeing that the financial statements conform to the applicable accounting standards. The auditor examines the company’s accounting and internal control systems, confirms assets and liabilities, and generally tries to determine that there are no material errors in the financial statements. The auditor’s report is an important source of information.
The standard auditor’s opinion contains three parts and states that:
- Whereas the financial statements are prepared by management and are its responsibility, the auditor has performed an independent review.
- Generally accepted auditing standards were followed, thus providing reasonable assurance that the financial statements contain no material errors.
- The auditor is satisfied that the statements were prepared in accordance with accepted accounting principles and that the principles chosen and estimates made are reasonable. The auditor’s report must also contain additional explanation when accounting methods have not been used consistently between periods.
An unqualified opinion (also known as an unmodified or clean opinion) indicates that the auditor believes the statements are free from material omissions and errors. If the statements make any exceptions to the accounting principles, the auditor may issue a qualified opinion and explain these exceptions in the audit report.
The auditor can issue an adverse opinion if the statements are not presented fairly or are materially nonconforming with accounting standards.
If the auditor is unable to express an opinion (e.g., in the case of a scope limitation), a disclaimer of opinion is issued. Any opinion other than unqualified is sometimes referred to as a modified opinion.
The auditor’s opinion will also contain an explanatory paragraph when a material loss is probable but the amount cannot be reasonably estimated. These “uncertainties” may relate to the going concern assumption (the assumption that the firm will continue to operate for the foreseeable future), the valuation or realization of asset values, or to litigation. This type of disclosure may be a signal of serious problems and may call for close examination by the analyst.