What are the 4 types of audit opinions with examples?

At the end of a statutory audit, the Auditor issues an audit report containing the Auditors views on the financial statements of the company. Since an audit is an engagement for verification of the books of accounts of an entity, the audit report is summarised in the audit opinion. The verification of the book of accounts and other relevant facts, help the auditor form an opinion and is the basis of the opinion expressed. In this article, we look at the four major types of audit opinions that can be expressed by an Auditor in India. The different types of audit opinion are based on the international practises followed by the accounting communities around the world.

Unqualified Opinion or Unmodified Opinion

An unqualified opinion is expressed by the Auditor when he/she concludes that the financial statements supply a true and fair view of the company’s financial standing in accordance with the financial reporting framework deployed in the preparation and presentation of the financial statements. Further, an unqualified opinion also indicates that:

• All accounting principles have been adopted properly, and the financial statement has been prepared using the generally accepted accounting principles;
• The financial statements comply with relevant legal regulations and requirements;
• There is adequate disclosure of all material matters relevant to the proper presentation of the financial information.

Qualified Opinion or Modified Opinion

An audit report is said to be a qualified report or a modified report if the Auditors report is modified to add emphasis or highlight a matter affecting the financial statements. One of the main reason for qualifying an audit report or modifying an audit report is if there are concerns to the auditor regarding a going concern problem and the going concern question is not resolved, and relevant disclosures have not been made in the financial statements. Example of a modified report includes a phrase such as the following in the audit report:

“Without qualifying our opinion, we draw attention to Note II of the Schedule to the financial statements. The entity is defendant in a lawsuit alleging patent infringement. The ultimate outcome of the matter cannot presently be determined, and no provision for any liability that may result has been made in the financial statements.

Disclaimer of Opinion

If there is a limitation on the scope of the auditor’s work or if there is a disagreement with management regarding the usability of the accounting policies selected, the method of their utilisation or the adequacy of financial statement disclosure, then an adverse or disclaimer of opinion is issued. Whenever an auditor issues an audit opinion that is qualified or adverse or a disclaimer of opinion, a clear description of all the reasons is included in the audit report. A disclaimer of opinion is expressed by an Auditor when the possible effect of limitation on the scope of the audit is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence.

Adverse Opinion

An adverse opinion is expressed when the possible effect of a disagreement with management is material and pervasive to the financial statements. Hence, the auditor concludes that the qualification of the audit report is not adequate to disclose the misleading nature of the financial statements. In case an adverse opinion is issued, the board of directors of the company are legally bound to submit an explanation to the members of the company. The explanation should inform the members the reason for the adverse opinion.

To know about the facility for Income Tax return filing offered by IndiaFilings, click here.

Post by IndiaFilings

IndiaFilings.com is committed to helping entrepreneurs and small business owners start, manage and grow their business with peace of mind at an affordable price. Our aim is to educate the entrepreneur on the legal and regulatory requirements and be a partner throughout the entire business life cycle, offering support to the company at every stage to make sure they are compliant and continually growing.

An auditor's opinion is a certification that accompanies financial statements. It is based on an audit of the procedures and records used to produce the statements and delivers an opinion as to whether material misstatements exist in the financial statements. An auditor's opinion may also be called an accountant's opinion.

Understanding Auditor's Opinions

An auditor's opinion is presented in an auditor’s report. The audit report begins with an introductory section outlining the responsibility of management and the responsibility of the audit firm. The second section identifies the financial statements on which the auditor's opinion is given. A third section outlines the auditor’s opinion on the financial statements. Although it is not found in all audit reports, a fourth section may be presented as a further explanation regarding a qualified opinion or an adverse opinion.

For audits of companies in the United States, the opinion may be an unqualified opinion in accordance with generally accepted accounting principles (GAAP), a qualified opinion, or an adverse opinion. The audit is performed by an accountant who is independent of the company being audited.

Key Takeaways

• An auditor's opinion is made based on an audit of the procedures and records used to produce financial records or statements.
• There are four different types of auditor's opinions.
• An auditor's opinion is presented in an auditor's report, which includes an introductory section, a section that identifies financial statements in question, another section that outlines the auditor’s opinion of those financial statements, and an optional fourth section that may augment information or provide additional relevant information.

Unqualified Opinion Audit

An unqualified opinion is also known as a clean opinion. The auditor reports an unqualified opinion if the financial statements are presumed to be free from material misstatements. In addition, an unqualified opinion is given over the internal controls of an entity if management has claimed responsibility for its establishment and maintenance, and the auditor has performed fieldwork to test its effectiveness.

Qualified Audit

A qualified opinion is given when a company’s financial records have not followed GAAP in all financial transactions. Although the wording of a qualified opinion is very similar to an unqualified opinion, the auditor provides an additional paragraph including deviations from GAAP in the financial statements and points out why the auditor report is not unqualified.

A qualified opinion may be given due to either a limitation in the scope of the audit or an accounting method that did not follow GAAP. However, the deviation from GAAP is not pervasive and does not misstate the financial position of the company as a whole.

Adverse Opinion

The most unfavorable opinion a business may receive is an adverse opinion. An adverse opinion indicates financial records are not in accordance with GAAP and contain grossly material and pervasive misstatements. An adverse opinion may be an indicator of fraud. Investors, lenders, and other financial institutions do not typically accept financial statements with adverse opinions as part of their debt covenants.

What are the different types of audit opinions?

What is an example of an adverse opinion?

What is the most common type of audit opinion?