The company's auditor gives a qualified opinion in the audit report if it is found that the company's financial statements are presented fairly, except in specific areas. It is just one notch below an Unqualified Opinion (i.e., a Clean opinion).
It is issued in those cases where the Auditor feels that the financial statement is not prepared following the rules laid down under GAAP/IFRS (Generally Accepted Accounting Principles/International Financial Reporting Standards), whichever is applicable. Such an opinion is very important because financial statements are important documents that provide information to stakeholders. Therefore, they should exhibit correct and relevant financial data.
Every financial statement of all companies needs to be verified by an auditor who has the responsibility of ensuring that the statements and information displayed on them are true and fair in all respects. They have the necessary knowledge and experience to understand and detect deviations from the actual data and accounting rules, which may prove to be detrimental to the organization.
In case of qualified opinion in audit report, it is important to understand that the financial information revealed within the statements like income statements, cash flow statements, balance sheets, and statements of changes in equity are used widely by both management and stakeholders to understand the risk and strength of the business, its market value, future plans and opportunities and so on. In other words, these are used by investors and analysts as well as the company to make important financial decisions that may decide its future growth potential.
The Audit report qualified opinion is almost similar to an Unqualified audit report Opinion with the only exception that certain records about Financial Statements, as per the advice of the Auditor, are not in conformity to the standards as laid down in GAAP/IFRS without giving any indication of misrepresentation of facts and figures. Whenever an Auditor gives such an Unqualified Opinion, they will highlight the reasons for the same in a separate/ additional paragraph.
Some of the areas which can lead to Auditors expressing a qualified opinion in the Audit Report are:
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Auditors come in with a huge responsibility to ensure that the information revealed does not lead to misstatement and misguidance. A qualified opinion on audit report is the one that the auditor gives stating that the statements are not as per the rules or there is no sufficient evidence of a particular transaction, all of which are not pervasive. Such details may affect the use of those documents. Such an opinion may also be due to the lack of information disclosed in the footnotes.
Let’s understand the concept of qualified opinion on audit report with the help of a few examples, which can result in an Auditor expressing a Qualified Opinion.
Rathi and Associates conducted Audit of ABC International as per the relevant provision of the Act and observed that the Sundry Debtors/Accounts Receivables reported by ABC International includes an amount of $40000 which is due from an entity which has ceased its operations and the debt is unsecured, and the company doesn't have any security to liquidate and realize its dues. Accordingly, ABC International must make a complete provision of $40000 in its Profit and Loss Account and reduce its Profit by the same amount before adjusting for tax.
As such, in my opinion (Auditor Remark), except for the matter described above as the basis for an Audit report qualified opinion, the financial statements present a true and fair view of the financial position of ABC International.
Franklin and Associates conducted Audit of Bata International and Observed that the company had reported Inventories on its Balance Sheet at Cost instead of the ideal practice of stating at lower of Cost or Net Realizable Value as per the relevant Accounting Standard pertaining to Valuation of Inventories. As per the records shared by Bata International if such Inventories were recorded at lower of Cost or Net Realizable Value would have resulted in Bata International Gross Profit falling by $20000 and Income Tax Expenses reduced by $2000 and Net Profit down by $18000 respectively.
As such, in my opinion (Auditor Remark), except for the incorrect inventory valuation treatment above as the basis for an Audit report qualified opinion, the financial statements present a true and fair view of the financial position of Bata International.
Clark and Associates conducted Audit of Moon Pharmaceuticals Limited, which reported revenues of $250000, out of which $50000 were cash sales. Auditors were unable to factually satisfy themselves about the cash sales recorded by the company due to inadequate systems of Internal Control and recording of such Cash Sales. As such, it is impossible to certify that the recorded revenues are free from material error relating to the Overstatement of Revenues.
As such, in my opinion (Auditor Remark), except for the matter described above as the basis for an audit report qualified opinion, the financial statements present a true and fair view of the financial position of Moon Pharmaceuticals.
Thus, we can conclude that such an independent auditor's report qualified opinion is a case where the auditor is not able to identify or gather sufficient proof to support a particular adjustment or transaction or does not follow the rules given in the accounting standards. Lack of verification and support leads to improper disclosure and uncertainty in the process.
It is essential to note that this opinion is mentioned in the third and final section of the report. This section points out to the position of the accounting statements and internal control procedures. This kind of opinion shows that the auditor is not able to verify the details to the fullest extent and hence, not able to complete the report properly.
It is necessary to understand that both the opinions mentioned in the heading above are related to what the auditor says after they scrutinize the entire financial statement of a company. But there are some points of differences between them, as follows:
Thus, the above are some important differences between the two types of opinion
This has been a guide to what is Audit Report Qualified Opinion. We explain it with some examples & differences with Audit Report Unqualified Opinion. You can learn more about financing from the following articles -
