Audit reporting: The 4 types of audit opinions & reports
In audit reporting, an auditor compiles and delivers their opinion about the audit results. As simple as that may sound, audit reports can actually be quite complicated. Some information required for audit reporting isn’t readily available, and some information is subjective. Not to mention, there are multiple types of audit reports and opinions an auditor can deliver.
When done well, an audit report can give the board, its audit committee and investors deep insight into the organization’s financial performance. They also allow auditors to comment on a company’s financial reporting and offer opportunities for improvement. To help companies understand what to expect from their next audit, this article will explain:
- What an audit report is
- What an audit opinion is
- The four types of audit reports and opinions
- Obtaining a favorable audit opinion
What is an audit report?
An audit report is a document in which an auditor shares their opinion on an organization’s financial performance and whether they’re compliant with financial reporting regulations. Auditors must follow the format defined by the generally accepted auditing standards (GAAS), with some exceptions depending on the nature of the audit.
That said, audit reports will generally include a description of the auditor’s role, management’s role, the scope of the audit and the audit opinion.
What is the purpose of an audit report?
The purpose of an audit report is to make a statement about a company’s financial status related to its financial reporting. Annual audits demonstrate transparency in corporate financial reporting, a positive step in establishing good relationships between companies, their investors, and the public.
The audit report provides a picture of a company’s financial performance in a given fiscal year and how effectively the company complies with regulations like the Generally Accepted Accounting Principles.
Investors analyze audit reports and base much of their investment decisions on information contained in the audit reports. Regulators will also review audit reports to decide whether to assess penalties for noncompliance.
When do auditors prepare their reports?
Before the audit, management provides financial information to the audit committee. During the annual audit, the auditor has to review the processes and procedures that the company used to prepare the financial information. After the audit, the auditors prepare the audit reports, including checking to see whether the company uses GAAP or other applicable reporting frameworks.
The 5 C’s of audit reporting
Though the contents of an audit report can vary slightly based on the auditor’s opinion, most reports will include the auditor’s point of view on what’s called the 5 C’s of audit report writing. These are:
- Condition: What is the item being reviewed?
- Criteria: What did the organization meet or fail to meet? This could range from a misstatement to a regulatory infraction.
- Cause: What made the issue possible?
- Consequence: What is the outcome of the auditor’s finding?
- Corrective action: How should the organization mitigate the issue?
What are the components of an audit report?
Audit reports typically have seven different components ranging from the auditor’s signature to their recommendations for the audited company. These components are:
- Report title: Most audit report titles should be straightforward and can indicate whether the auditor is independent or not.
- Introduction: This section is typically a short paragraph that includes the company and duration under audit.
- Scope: This section is roughly a paragraph and defines what the auditor reviewed.
- Executive summary: The auditor briefly summarizes the audit results and their opinion.
- Opinion: Following the executive summary, the auditor will provide more detail about their opinion and what it means for the organization.
- Auditor’s name and signature: The auditor will close the report with their name and signature.
What is an audit opinion?
An audit opinion is a section of the audit report explaining the audit results.
The audit opinion is based on several variables. The audit opinion is based on several variables. For example:
- How available the data was to them
- Whether they had an opportunity to follow all due procedures
- The level of materiality
Each of these variables is subjective and depends on the auditor’s opinion.
An adverse audit opinion can damage a company’s status. In some cases, adverse audit opinions may lead to litigation. Regulatory bodies may also scrutinize the audit opinion and the audit report to verify the information for accuracy and any impact on taxation matters.
The 4 types of audit opinions
Auditors can choose among four different types of auditor opinion reports. An auditor opinion report is a letter that auditors attach to the statutory audit report that reflects their opinion of the audit. The four audit opinion types are:
| Opinion | Type of audit report |
|---|---|
| Unqualified | Clean report |
| Qualified | Qualified report |
| Disclaimer of opinion | Disclaimer report |
| Adverse | Adverse audit report |
Unqualified opinion – clean report
An unqualified opinion is considered a clean report. This is the type of report that auditors give most often. It is also the type of report that most companies expect to receive.
An unqualified opinion doesn’t have any adverse comments, and it doesn’t include any disclaimers about any clauses or the audit process.
Why an auditor issues an unqualified opinion
This report indicates that the auditors are satisfied with the company’s financial reporting. The auditor believes the company’s operations comply with governance principles and applicable laws. The company, the auditors, the investors and the public perceive such a report to be free from material misstatements.
Unmodified opinion
An unmodified opinion is the same as an unqualified opinion, but the difference comes down to context. Clean audit reports for publicly listed companies have an unqualified opinion, while those same reports for private companies are considered unmodified.
Qualified opinion – qualified report
A qualified opinion results in a qualified report. It typically indicates that the auditor isn’t confident about any specific process or transaction, which prevents them from issuing an unqualified or clean report. Investors don’t find qualified opinions acceptable, as they project a negative opinion about a company’s financial status.
Auditors write up a qualified opinion in much the same way as an unqualified opinion, with the exception that they state the reasons they’re not able to present an unqualified opinion.
Why an auditor issues a qualified opinion
An auditor will give a qualified opinion and qualified report if they can’t confidently clear the organization's financial statements or financial reporting practices. A common reason for auditors issuing a qualified opinion is that the company didn’t present its records with GAAP.
Disclaimer of opinion – disclaimer report
A disclaimer of opinion results in a disclaimer report. When an auditor issues a disclaimer of opinion report, it means that they are distancing themselves from providing any opinion at all related to the financial statements.
The general consensus is that a disclaimer of opinion constitutes a very harsh stance. As a result, it creates an adverse image of the company.
Why an auditor issues a disclaimer of opinion
Some of the reasons that auditors may issue a disclaimer of opinion are because they felt like the company limited their ability to conduct a thorough audit or they couldn’t get satisfactory explanations for their questions. They may not have been able to decipher the correct nature of some transactions or to secure enough evidence to support good financial reporting.
Auditors who aren’t allowed an opportunity to observe operational procedures or to review particular procedures may feel like they’re not able to express a definite opinion, so they feel a disclaimer is necessary and in order.
Adverse opinion – adverse audit report
The final type of audit opinion is an adverse opinion. An auditor’s adverse opinion is a big red flag. An adverse audit report usually indicates that financial reports contain gross misstatements and have the potential for fraud.
Why an auditor issues an adverse opinion
Auditors who aren’t at all satisfied with the financial statements or who discover a high level of material misstatements or irregularities know that this creates a situation in which investors and the government will mistrust the company’s financial reports.
Adverse opinions send out a high alert that the company’s records haven’t been prepared according to GAAP. Financial institutions and investors take this opinion seriously and will reject doing any kind of business with the company.
Obtaining a favorable audit opinion
Auditors form their opinions by making professional judgments and getting legal opinions. To satisfy auditors’ keen eye and earn an unqualified opinion, it’s vital that companies:
- Implement internal controls: Internal controls not only lead to better financial statements, but they also make financial performance more defensible to auditors.
- Create strong financial policies: It’s easier to build a compliant financial reporting process than it is to fix one with deep-seated flaws. Create and implement policies with GAAP in mind.
- Conduct regular reviews: Organizations should have financial controls and policies reviewed regularly by the company’s internal audit team to ensure that everything is in order before the audit ensues.
- Utilize software solutions: Board management software programs support the accountability and transparency of financial reporting to ensure that companies get the best auditor opinion letter, while audit management solutions ensure that companies are well positioned to earn unqualified opinions in their audit reports. It drives efficiency across the audit workflow with built-in best practices and a solution that scales with you.
Modernize your approach to audit reporting
Auditors use all types of qualified reports to alert the public as to the transparency, reliability and accountability of companies. Auditor opinions place pressure on companies to change their financial reporting processes and pay closer attention to practices like ESG so that they’re clear and accurate. Companies, investors and the public highly value unqualified reports.
Efficient management of the audit process, coupled with a modernized approach, allows your organization to stay ahead of emerging risks. From empowering informed decision-making to automated, time-saving processes, Diligent’s Audit Management solution helps you to deliver audit reports with ease.
