Determination of Audit Opinions
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Audit opinions allow stakeholders to evaluate a company according to compliance with accounting rules and the likelihood of continuing to operate. Auditors consider many factors when issuing an audit opinion; these include, information available, financial viability, and errors found, as well as other limiting factors.
Audit Opinion Basics
The first page of a financial statement will include information on the type of audit opinion a company has received. This information is referred to as the “audit opinion letter” and states whether financial statements are fairly represented in all material respects and free from material misstatement and compliant with the Generally Accepted Accounting Principles (GAAP). The audit opinion letter does not necessarily endorse a company, nor does it evaluate the company’s financial results.
The audit opinion letter is generally written in three paragraphs. The first identifies the company, accounting period, and the auditor’s responsibilities. The second paragraph includes the scope of the work done. The final section contains the audit opinion.
Generally, one of four types of audit opinions is issued. Listed from best to worst:
- Unqualified. An unqualified opinion is the most desirable, and most common, opinion. Unqualified indicates that a company’s financial condition, position, and operations are accurately portrayed in financial statements.
- Qualified. A qualified opinion indicates that an auditor discovered a small deviation from GAAP in financial records. For example: if a borrower incorrectly estimates a warranty expense, but the mistake does not affect the rest of the financial statements, an auditor will deem the business qualified. Qualified opinions may also indicate a company’s management is limiting the scope of an audit. An example of limiting audit scope is the denial of access to a warehouse to observe year-end inventory accounts for an audit.
- Adverse. An adverse opinion indicates material exceptions to GAAP that affect financial statements as a whole. Adverse opinions indicate that financial statements are not fairly represented, these opinions will usually contain an additional paragraph outlining the exceptions.
- Disclaimer. The most alarming opinion is a disclaimer. A disclaimer indicates that an audit was not completed due to significant misrepresentations. These might include dramatic scope limitations, material doubt about the company’s going-concern status, and uncertainties within the subject company. A disclaimer opinion letter will indicate why the audit was not completed.
Prepare for your Audit
We can review with you your 2018 financial statements for any foreseeable deviations from GAAP or significant scope limitations. In some instances, we may also be able to recommend changes to avoid negative audit opinions and help you to communicate with stakeholders proactively in the case of an imperfect audit opinion. Contact us at 949-860-9902 or click here, and we will contact you.