• By: RedPen
  • April 12, 2022
Reading Time: 6 minutes

What is a Compensation Committee

Audit reports give the boards of companies and nonprofits a professional opinion on the organization’s financial performance.

Audit reports contribute largely to the growth of a business. Not only do they outline the company’s financial status, but they also include the informed opinion of professional auditors on the company’s performance.

Since the different audit opinion types are made from the available company data, keeping accurate and well-organized data can improve the auditor’s professional judgment. OnBoard has a full-feature board management platform that can help you reduce the complexity of organizing your company’s data for the best auditor opinion.

This article will cover the 4 types of audit opinions and their impact on your company.

What’s an Auditor Report?

An audit report expresses an auditor’s opinion on a company’s financial performance and compliance with generally accepted accounting principles (GAAP). These principles set by the Financial Accounting Standings Board provide clarity on the auditing process so that auditors can make their opinions objectively.

The report summarizes the company’s assets and liabilities to ascertain whether it is free of material misstatement. From there, companies can identify areas to improve or determine what to look for in prospective investors.

While the document is prepared for the company, auditors may release the report to the public where any interested parties like investors can see it. It is from such reports that investors make the decision to invest in the company or not.

What Does an Auditor Do During an Audit?

Depending on the size of the company, an auditor can work alone or in a team of auditors to ensure the auditing process is exhaustive. The company’s management submits all the financial records available to the auditing team to get started.

The auditor reviews the company’s data collection and recording processes and checks them against GAAP’s reporting frameworks. The findings of this review will help the auditor to form objective opinions on the company’s financial status.

Companies that do annual audits gain a better standing with other companies and investors because of their transparency in financial reporting.

4 Different Types of Auditor Opinions

After reviewing the company’s financial reports, auditors write a letter expressing their opinion of its financial position. This opinion varies depending on the company’s compliance with the GAAP guidelines and the accuracy of the available financial information.

There are four different types of auditor reports. They include:

  • Clean Report or Unqualified Opinion
  • Qualified Report or Qualified Opinion
  • Disclaimer Report or Disclaimer of Opinion
  • Adverse Audit Report or Adverse Opinion

Let’s look at how each of them works.

1. Clean Report or Unqualified Opinion

A clean report means the auditors found no issues with the company’s financial reports, and the company is in full compliance with GAAP guidelines. It’s also referred to as an “unqualified audit opinion” example, because the auditors conclude the company does not need to adjust or correct anything to improve its financial status.

This kind of report shows the auditors are satisfied with the company’s financial performance. Therefore, once the report is released to the public, investors and other interested parties consider it positive news on the company.

2. Qualified Report or Qualified Opinion

If the company’s financial reporting doesn’t comply with the GAAP guidelines, auditors may have no choice but to give a qualified opinion. It’s almost similar to an unqualified opinion except for the statement that shows the company is not compliant with GAAP.

It shows the different areas where the company can improve and the qualifications it must meet for standard financial reporting practices. Companies use qualified reports to identify areas that need fixing so they can improve their financial status.

Investors view a qualified opinion as a negative mark on the company and may refrain from investing in a company.

3. Disclaimer Report or Disclaimer of Opinion

The company must allow the auditors to access their financial records without any restraints for an effective auditing process. However, if the auditor feels the company limited their access or they couldn’t get satisfactory answers to any of their questions during the audit, they may give a Disclaimer Report.

Basically, a disclaimer report distances the auditor from reporting on the company’s financial status as they cannot issue a definitive opinion. This could help to protect the auditor’s reputation in case the company faces a legal issue.

A disclaimer of opinion example would be where the auditor states the reason for their opinion as “inability to obtain sufficient and appropriate audit evidence as a basis of an audit opinion.”

4. Adverse Audit Report or Adverse Opinion

An adverse audit report shows the company is not compliant with any of GAAP’s guidelines for financial reporting and therefore portrays gross misstatements on their assets and liabilities. In this kind of audit report, the auditors discover instances of financial misappropriation and other irregularities, as well as inconsistent financial statements.

An adverse report highlights potential fraud in the company and alerts investors and other business entities to avoid it. On the other hand, the report offers the company an opportunity to improve its practices and address the underlying issues.

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Structure of an Auditor Report

Most auditor reports carry the same structure even though they display different opinions. The template’s heading displays the dates, auditor’s name, the company, and the address. The body of the report is broken down into different segments as follows:

Auditor’s responsibility

The auditor must state and explain their responsibility of auditing the company’s financial status as required by the law. They confirm they will do their best to provide results that are unbiased and free of personal influence.

Auditor’s opinion

In this section, the auditor outlines their opinion of the company’s financial status depending on their findings. They state whether the report is clean, qualified, disclaimer, or adverse opinion, and then go on to explain their opinion.

This part usually include details such as:

  • Company’s name
  • Auditing timespan, such as annual, quarterly, etc.
  • Financial records presented to the auditor for review
  • Auditor’s opinion on the company’s financial position
  • A statement on the company’s compliance with GAAP guidelines

Basis for opinion

This section explains the auditor’s opinion in the previous section. It consists of the auditor’s opinion (report type), the different assessments undertaken in the review process, compliance to GAAP guidelines, results of the tests, and an explanation of the audit.

Depending on the type of audit report issued by the auditor, this section can include areas that require improvement and other recommendations to help the company do better. Company management can use this section to determine areas that can use some improvement.

Other Reporting Responsibility

This part is not mandatory, especially for clean reports. However, auditors can use this section to pinpoint specific company issues that need attention. For example, if the auditor discovered some irregularities in the financial reports, they can report such findings in this section.

In some cases, the auditor may recommend additional responsibilities that may be carried out away from typical duties to allow better assessments. Such information is included in this section.

Signatures

The official signatures give weight to the document. Therefore, the final document must be signed correctly once the auditing process is completed. The signature section includes the city where the auditing was done, the date of signing, and the space for the signature.

The details allow the investors and interested candidates to verify the authenticity of the report and its age. After the signature, the report is sent out to the public.

How OnBoard Simplifies the Reporting Process

An auditor’s opinion determines how well your company performs after the audit. Most companies seek an unqualified opinion so they are able to attract investors and foster good relationships with other business entities.

OnBoard Board Management Software can help you keep your financial records organized so you can perform a less-tedious auditing process. This helps auditors get the best results and give their opinions accurately.

Ready to upgrade your board’s effectiveness with OnBoard the board intelligence platform? Schedule a demo or request a free trial