How to Decipher Audit Reports May 30, by Richa Auditing of organizational processes is carried out to check the efficiency of the system, the practices that are being followed and to investigate the company records, operations and functioning of the individual departments.
In the best case, the auditor finds that the financial statements are in accordance with generally accepted accounting principles, and an unqualified audit opinion is issued, but this isn't always the case.
Understanding the types of qualified audit reports can help you determine what the effect of a qualified opinion could have on your business.
Departure from GAAP If the auditor determines that the financial statements generally are in accordance with GAAP, except for a minor departure, a qualified opinion is issued. Also known as an "except for" opinion, this type of opinion isn't very common, but does occur. In most cases, the company would choose to correct the financial statements in order to receive an unqualified opinion.
In other cases, a company may decide that the trouble and expense of making a correction is not worth the benefit of a clean opinion. Scope Limitation When an auditor is unable to audit some portion of the financial statements, a scope limitation is said to have occurred.
The most common reason for a scope limitation is the inability of the auditor to audit the inventory balance. In most cases, generally accepted auditing standards require auditors to observe the company's annual inventory count.
If the auditors are unable to observe this count, and, for whatever reason, are unable to design alternative procedures to attest to the correctness of the inventory balance, a qualified opinion is issued.
This opinion would state that the financial statements are fairly presented, except for the inventory balance, which could not be audited. Adverse Opinion An adverse opinion is issued when the financial statements are materially misstated or misleading, or in the event that, when taken as a whole, they are not in compliance with GAAP.
In practice, this is rare.
Most companies would dismiss the auditor or the auditor would dismiss the client before this would occur. If both parties wish to continue the audit relationship, this opinion is an option.
Many small businesses, as a condition of lending agreements, are required to receive an annual audit. Even if the lending agreement does not require the firm to receive an unqualified opinion, the agreement will often specify that an adverse opinion would not meet the requirements of the agreement.
Disclaimer of Opinion If scope limitations are so pervasive that the auditor is not able to render an opinion on the financial statements overall, a disclaimer of opinion is issued.
This report tells financial statement users that the auditor was unable, and refuses, to provide any opinion on the financial statements.
Most third parties, such as creditors and lenders, will not consider a disclaimer of opinion satisfactory for meeting audit requirements. In these cases, companies are usually required to correct whatever caused the auditor to not be able to obtain the information sought, and to begin another audit.
References 1 Auditing and Assurance Services: An Integrated Approach; Alvin A. About the Author John Freedman's articles specialize in management and financial responsibility.Jun 11, · How to Write an Audit Report.
In this Article: Article Summary Preparing to Write an Audit Report Beginning Your Report Writing Your Results and Recommendations Community Q&A An audit report is the formal opinion of audit findings.
The audit report is the end result of an audit and can be used by the recipient person or organization as a tool for financial reporting, investing, altering 87%(90). Jul 09, · How to Write a Problem Statement. In this Article: Article Summary Sample Problem Statements Writing Your Own Problem Statement Polishing Your Problem Statement Community Q&A A problem statement is a short, succinct explanation of a problem a business is facing and a proposed solution to the problem.
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