Razan Al-Mahdi
Accountant at 3A CPA LLP
Understanding audit opinions might seem confusing at first, but actually, with a little plain English they’re pretty straightforward. Let’s break them down together and see.
What Is an Audit Opinion Anyway?
It is the auditor’s official verdict on whether a company’s financial reports are fair, accurate and compliant with accounting standards. It provides stakeholders with a level of assurance regarding the reliability of the information presented.
There are four types of audit opinions, each carrying distinct implications:
1. Unqualified Opinion
What it means: Basically, everything looks good in here! It’s also referred to as a “clean” opinion.
As you can imagine, this is the most desirable outcome of an audit. It signifies that the auditor has concluded, without reservation, that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. This indicates a high degree of confidence in the integrity of the financial information.
2. Qualified Opinion
What it means: It’s ok but there are issue/s to note!
A qualified opinion is issued over 2 instances, either when the auditor identifies one or more material misstatements that are not affecting the whole of the financial statements (pervasive) but just a small part of it, or when there is a limitation in the scope of the audit that is material but again, not pervasive. The auditor will state, except for the effects of the matter to which the qualification relates (which is the issue to highlight), the financial statements are presented fairly, in all material respects. This signals that users should be aware of this issue/s while still finding the overall presentation reasonably reliable.
Implication to stakeholders: Proceed with caution!
3. Adverse Opinion
What it means: We have a serious problem!
This is given when the auditor concludes that the financial statements, taken as a whole, are materially misstated and the misstatements are pervasive. This indicates significant concerns about the reliability and fairness of the financial information, suggesting that users should not rely on the financial statements.
Implication to stakeholders: Proceed at their own risk!
4. Disclaimer of Opinion
What it means: The Auditor cannot even begin to find the strength to proceed, it’s that serious!
It is usually issued when the auditor is unable to obtain sufficient appropriate audit evidence to form an opinion on the financial statements as a whole. This can arise due to significant limitations in the scope of the audit, such as restrictions imposed by management (which in itself is a red flag) or a lack of access to crucial information. In such cases, the auditor explicitly states that they do not express an opinion on the financial statements.
Implication to stakeholders: A clear no go!
Is it really important to understand them?
YES! Audit opinions are the result of the whole audit process and therefore act like the smoke alarm before the fire, a warning sign if you will. They allow stakeholders such as investors, lenders, regulators and Management themselves to know when a company’s finances are going south.
Should audit opinions always be trusted?
The short answer according to recent history is unfortunately a big NO!
There have been many scandals over the years with Audit Firms giving Unqualified Audit Opinions to companies/banks which later collapsed.
The truth is, the audit process relies heavily upon professional integrity, scepticism and ethical responsibility which when upheld by Auditors, all lead to a powerful safeguard for investors and the Public. However, when compromised, whether by negligence or conflict of interest, the opinion becomes worth less than the paper it’s written on.
In a nutshell, any qualification, adverse or disclaimer opinions should be taken seriously and with clear steps towards resolution. This is because companies need to safeguard their reputation, maintain investor confidence and promote long-term success.
By Razan Al-Mahdi, ACCA
