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What Is an Audit Adverse Report?

An adverse audit report relates to just one of the five opinions an independent auditor can issue relative to a firm's financial statements. The auditors will specifically opine on whether the financial statements present fairly, in all material respects, the financial position of the firm examined in accordance with Generally Accepted Accounting Principles (GAAP).

  1. Audit Reporting

    • In accordance with audit reporting standards, an auditor must either express an opinion on the financial statements taken as a whole or state that an opinion cannot be expressed.

    Types of Audit Opinions

    • There are five types of audit opinions -- (1) unqualified opinion, (2) unqualified opinion with explanatory language, (3) qualified opinion, (4) adverse opinion, and (5) disclaimer of opinion.

    Adverse Opinion

    • According to Statements on Auditing Standards (SAS) 58 - "Reports on Audited Financial Statements," an adverse opinion states "that the financial statements do not present fairly the financial position or the results of operations or cash flows in conformity with generally accepted accounting principles."

    Explanation Needed

    • Whenever an adverse opinion is issued by an audit firm, a separate explanatory paragraph is needed prior to the actual opinion. The purpose of this added explanation is to provide the reasons for the adverse opinion and the effects of the identified situations on the financial position, results of operations, and cash flows of the firm examined.

    Necessity

    • The added explanation(s) are necessary because an adverse audit opinion related to a firm's financial statements essentially means that the auditor(s) have found material misstatements during their examination, and as a result, the public should not rely on these financial statements to make investment or other business decisions.

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