Updated July 18, 2023
Introduction of Unqualified Opinion of Auditor
In an audit engagement, the auditor must express his opinion on the financial statements based on the audit process carried out. The Auditor’s report forms part of the annual report which is circulated to the shareholders and stakeholders. Auditor’s Opinion plays a key role as readers and users of the financial statements place their reliance on the facts presented based on the opinion expressed by the Auditor. Any comment mentioned in the audit report has a significant impact on the business.
An unqualified opinion is an opinion of the independent auditor on the financial statements of a company audited by him. An Unqualified opinion is the most common form of Audit report unless and until there are material issues to be reported like material misstatements, non-disclosure of significant information, enough evidence substantiating the transactions are not obtained at the time of the audit, etc. It is also known as a clean report.
This opinion gives an understanding that the financial statements are prepared as per appropriate GAAP (Generally Accepted Accounting Principles), Adequate disclosure of all significant and material transactions are appropriately presented and that the financial statements present fairly the affairs of the business in all the material aspects and are free of misrepresentation. The opinion on the financial statements is given by the Auditor based on the audit carried out and based on the collection of sufficient and appropriate audit evidence. This opinion does not indicate anything about the financial performance and economic health of the company, it just indicates the financial reporting is clear and the facts are presented appropriately in the financial statements.
Examples of Unqualified Opinion of Auditor
Z Corp is a publicly traded company. For the year-end Dec’2019, it has hired Xen & Co to conduct an audit of Financial Statements. After carrying out substantive audit procedures, testing, and with proper documentary evidence, Xen & Co using its best judgment as per the auditing statements concludes that the financial statements present a true and fair view of the financial position of Z Corp and are free of material misstatement. In the Audit report of Z Corp, Xen & Co expressed an unqualified opinion.
Importance of Unqualified Opinion in Auditor’s Report
- The Audit report is important for the company as it acts like a confirmation on the data presented in financial statements. An unqualified opinion in an audit report is even more important as it helps the shareholders and stakeholders to place reliance on the facts presented. It gives a sense of confidence and a positive note to the users of financial statements.
- Auditor’s opinion has a significant impact on the business. (E.g.) An unqualified opinion gives a sense of comfort to the bankers, Creditors, and other stakeholders.
- It demonstrates the integrity and morality of the management to the Board of directors, Investors, and shareholders.
- It is a legal requirement to submit an audit report along with financials. An Unqualified opinion proves to the Government that the company is conducting its operations in compliance with the law and it will be helpful for other statutory clearances. (E.g.) Tax payment to Government.
- It is useful at the time of obtaining a loan from banks or financial institutions.
- It gives a positive impression about the company to potential investors.
Advantages of Unqualified Audit Opinion
Some of the advantages are given below:
- Unqualified Audit opinion indicates that the financial statements represent a true and fair view and it gives a sense of positive image about management. It helps in obtaining finance from banks and financial institutions with ease as financial statements are used as a base to grant loans. On the other hand, the qualified or adverse opinion indicates that the financials cannot be trusted completely, and banks may hesitate to fund the company.
- Once a company gets a qualified opinion, the auditor for the subsequent period will have to spend a lot of time in performing audit procedures and analysis to form an opinion which in turn will lead to increased Audit fees. Whereas in the case of unqualified opinion it gives a sense of confidence and trust to auditors to work in the subsequent period.
- The Unqualified opinion helps creditors to trust the company’s financials and to assess their creditworthiness. Whereas qualified opinion makes creditors lose their hope in the company and they may start demanding the due amount from the company.
- Stakeholders’ relations will be smooth in case of an unqualified opinion (e.g.) vendors can give more credit days for their supplies by relying on the financials. In the case of qualified opinion, the basis for confidence in the company will be low and it may lead to tough commercial terms and conditions.
Disadvantages of Unqualified Audit Opinion
Some of the disadvantages are given below:
- An Unqualified Opinion is expressed based on the audit procedures carried out and the evidence obtained. The scope of the audit is limited and there are always chances for misstatements and errors as the auditing is all about sampling and test checking. 100% of transactions are not verified. So, a complete reliance cannot be placed on the financials based on the unqualified audit opinion.
- Audits are always subject to some inherent risk and some fraud risk which is purposefully hidden from the auditors. In these cases, the financial statements don’t give the true view of the company despite the auditor expressing an unqualified opinion.
- The Audit opinion is not a guarantee it is only an independent professional opinion. They use their best judgments to assure the accuracy and correctness of financial statements.
An unqualified opinion is expressed by the auditor after performing all the adequate audit proceduresand risk assessments where the auditor strongly believes that the financial statement has no material misstatements. They also check for the internal control system in the company to obtain reasonable assurance.Audit report and Auditor’s opinion plays a key role in the annual report and it influences the business in a bigger way. There are lots of advantages that come from an unqualified audit opinion and every company expects its financials to be cleared by the auditors and to get an unqualified opinion.
Management is responsible for the preparation of the financial statements as per applicable accounting standards and relevant laws. They are responsible for presenting the financials without any material misstatement and errors. The auditor must carry out the audit following the auditing standards and provide an independent audit opinion based on the findings.
This is a guide to Unqualified Opinion of Auditor. Here we also discuss the introduction and example of unqualified opinion of auditor along with advantages and disadvantages. You may also have a look at the following articles to learn more –