Updated July 17, 2023
Definition of Audit Report Qualified Opinion
Qualified opinion, an opinion provided by the auditor in the audit report of a listed company, states that the financial statement of the company is not showing true and fair view due to various reasons that are non-pervasive, non- material, and does not affect the financial statement such as non-application of the generally accepted accounting principle, inadequate disclosures to the financial statement or similar reasons which indicate an issue from the auditor.
Explanation
Generally, companies that are listed in the stock market need to get their financial reports audited by an independent auditor to verify whether the financial statement reflects that it is clear and complete and shows the state of affairs of the company. Sometimes due, to investigations by federal agencies, for loans etc, the company needs to get its accounts audited too. So, in this case, an external auditor is appointed to conduct an audit a pass on opinion on the financial statement that whether the financial statements are materially correct and reflects true and fair view.
Types of Opinion
An audit report is a place where the auditor speaks about the experience, evidence, knowledge gained about the company in the course of audit of the company, and overall pass an opinion on the financial statement of the company. The audit opinion is of four types: Clean or Unqualified audit opinion, Qualified opinion, Adverse opinion, and Disclaimer of the opinion. The clean or Unqualified opinion stands that there is no misrepresentation or misstatement in the financial statement provided by the company. on the other hand, the Qualified opinion stands for an overall clean report with some issues here and there but not of a pervasive nature.
The Adverse report states that the financial statement does not reflect the true and fair view and the error or misstatement is of material and pervasive nature. The last opinion, disclaimer of opinion stands for the inability of the opinion to pass on an opinion due to lack of sufficient and appropriate audit evidence and due to lack of evidence, any opinion could not be passed.
Examples of Audit Report Qualified Opinion
The qualified opinion is generally passed when the financial statement does not reflect or follow the requirements stated by GAAP or generally accepted accounting principles. But besides that, there are no other misrepresentation or material misstatements. The auditor writes the audit opinion in the opinion part of the audit report. in case of a clean or unqualified audit report, the auditor just needs to state that the books are maintained as per the generally accepted accounting principles. And it considered as a favourable report to the business. on the other hand, the unqualified report is also reported in a manner similar to the qualified report but there is an addition of the paragraphs that states for which the report is not unqualified.
For example, the company XYZ that is publicly traded hires the auditor to audit the financial statement. the auditor after the careful evaluation of the company concludes that the state of affair of the company is managed properly but the financial statements are not prepared as per the generally accepted accounting principle. The auditor has stated the same in the audit opinion in detail regarding the points where it feels that GAAP is neglected.
Implications of Audit Report Qualified Opinion
Though the qualified opinion does not weight much, because it indicates issues that are not pervasive or affect the going concern nature of the business, it still creates some issues amongst the stakeholders of an entity. As the qualified opinion states that the issues about the audit report are not material, it denotes that the problems are existent but as these are quite small when the overall picture is measured, it would not affect much. For instance, a transaction of $1 million is not correct in the opinion of the auditor and the same has been reported as a qualified opinion. If the company has a profit close to 1000 million, then an error or issue or one million would pass on as a minute amount. So, these issues could be ignored considering the overall picture.
Impact of Audit Report Qualified Opinion
An Audit report could impact the opinion of the stakeholders moderately. It depends upon the basis on which the qualified opinion is being provided. Sometimes an auditor put forwards the audit opinion in the case of limitation on the scope of the audit. It means that the scope of the area to explore and to collect the evidence. For example, if the auditor wants to verify the inventory by physical count and in some ways, if it is restricted or prohibited to do so, then the auditor could provide a qualified opinion. The reason behind providing the opinion matters and sometimes banks could ask for additional disclosures or requirements for availing further credit etc.
The same could happen in the case of finding other investors as well. Similarly, in the case of the qualified opinion, the federal agencies, or local bodies could also ask for clarification, or additional disclosures, if the matters affect their domain. From the viewpoint of investors, if the qualified opinion is issued, it is considered that the audit and management are working properly and there is a condition of faith in the system. Also, if the reason behind the qualification turns out to be serious or dubious, negative sentiment could be visible in the stock market.
Conclusion
Overall, the qualified opinion states more about the issues that are non-pervasive, not to be considered material in nature, and does not affect the going concern of the company. Though the company initially tries to get the issues covered by having extended consultation with the auditor. Sometimes when issues do not resolve, a qualified opinion is being issued. For, most of the time as issues are manageable, the qualified opinion doesn’t affect the reputation of the company, but sometimes it affects the share prices or requires additional disclosure requirements.
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