Any publicly listed company in the U.S. is required to have its financial statements audited. This process improves internal controls and assesses a company's performance. Finance leaders need to understand the different types of audit reports so they can make confident decisions and optimize their processes.
The main types of audit reports are unmodified opinion reports, qualified opinions, adverse opinions and disclaimers.
Unmodified opinion reports are given when the auditors are able to access all the data they need in the proper formats. Qualified opinions are given when there are parts of financial records missing or not conforming to the proper standards. Adverse opinions are made when the company's financial situation as a whole is unreliable or unconfirmed. Disclaimers are made when the auditor isn't able to finish the report. Each type of audit report has a distinctive role and provides valuable insights into your company's financial performance.
What Is an Audit Report?
An audit report is an official evaluation of an entity's financial status, combined with the auditor's opinions and collected data on the entity's financial transactions and situation. This is a common process for companies to use when examining their own records and releasing financial information to investors or potential investors.
Internal vs. External Audits
Audits may occur within or outside of the company in question. An internal audit is performed by accountants who work inside the company. These audits are usually easier to perform and do not take as long since the auditors are familiar with company records and have experience in making reports.
However, investors and official agencies do not have the same trust in internal audits, and many companies do not have the resources to perform them, so external audits are also practiced. In this case, a company will hire a firm to perform audits on its behalf. There are four distinct types of audits that can be produced, whether internal or external.
The unmodified opinion report is the purest type of auditing report. It is unmodified by any caveats the accountant writing the report may have, meaning that they have been able to access all needed financial information and that the information was in conformity with GAAP (generally accepted accounting procedures). This makes it much easier for the accountant to perform the audit, but there are several qualifications the auditors are required to mention, such as whether other accountants besides the writer worked on the audit or whether there are concerns about the company's financial status.
A qualified opinion report is given when the auditors were not able to fully satisfy themselves on all aspects of the company's financial status. Specific records may be missing, or some parts of information may not be up to GAAP. In some cases, the auditor may be able to access data but not fully confirm it. All these problems are documented and make the auditor's evaluation more negative.
An adverse opinion report is a negative response that occurs only when the auditor finds the company's records as a whole are uninformative and not in line with GAAP, or if the financial records have been falsified or are in other ways erroneous. The accountants add paragraphs explaining these problems and giving their opinions as to how the records differ from GAAP.
Disclaimer of Opinion
The disclaimer report is issued only when the auditors are unable to perform their work. When not enough time or information is available, a disclaimer of opinion report is issued. This is rare. An auditor will often only make this report if the company refuses to reveal specific information or if the auditing firm and the company break their contract.
There are other influences auditors must consider when making their report, usually concerning the state of the company. If the company is being investigated for a specific crime, or if it is expected to be sold or dissolved within the next year, the auditors take this into consideration and alter their report because of it.