What’s Your Audit Opinion
The type of opinion your auditor issues tells stakeholders whether you’re in compliance with accounting rules and likely to continue operating as a going concern. These opinions differ depending on the information available, financial viability, errors discovered during audit procedures and other limiting factors. Because the auditor’s opinion could be a consideration factor for investors and/or lenders, it’s important to understand their meaning.
The “audit opinion letter,” on the first page of your financial statements, is where your auditor states whether the financial statements are fairly presented in all material respects, compliant with Generally Accepted Accounting Principles (GAAP) and free from material misstatement. But the opinion doesn’t constitute an endorsement or evaluation of the company’s financial results.
Most audit opinion letters consist of three paragraphs. The introductory paragraph identifies the company, accounting period and auditor’s responsibilities. The second discusses the scope of work performed. The third paragraph contains the audit opinion.
In general, there are four types of audit opinions, ranked from most to least desirable as follows:
- Unqualified. A clean “unqualified” opinion is the most common (and desirable). Here the auditor states that the company’s financial condition, position and operations are fairly presented in the financial statements.
- Qualified. The auditor expresses a qualified opinion if the financial statements appear to contain a small deviation from GAAP, but are otherwise fairly presented. To illustrate: An auditor will “qualify” his or her opinion if a borrower incorrectly estimates warranty expense, but the exception doesn’t affect the rest of the financial statements.
Qualified opinions are also given if the company’s management limits the scope of audit procedures. For example, a qualified opinion may result if you deny the auditor access to a warehouse to observe year-end inventory counts.
- Adverse. When an auditor issues an adverse opinion, there are material exceptions to GAAP that affect the financial statements as a whole. Here the auditor indicates that the financial statements aren’t presented fairly. Typically, an adverse opinion letter contains a fourth paragraph that outlines these exceptions.
- Disclaimer. Even more alarming to lenders and investors is a disclaimer opinion. Disclaimers occur when an auditor gives up mid-audit. Reasons for disclaimers may include significant scope limitations, material doubt about the company’s going-concern status and uncertainties within the subject company itself. A disclaimer opinion letter briefly outlines the auditor’s reasons for throwing in the towel.
Concerns? Work with your accountant
Before fieldwork starts for the audit of your 2018 financial statements, discuss any foreseeable scope limitations and possible deviations from GAAP with your accountant. Depending on the situation, your accountant may be able to recommend corrective actions now to impact future audit opinions. Additionally, your accountant can help you proactively communicate with stakeholders about the reasons for a less-than-perfect audit opinion. Our firm is known for delivering outstanding customer service. To learn more about how we can help your business, contact Stephanie Pogacnik, CPA, CFE, Ciuni & Panichi Senior Accountant at 216-831-7171 or by email here.
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