When an independent auditor completes an audit of a company, he expresses his opinion of the financial statements in a formal letter to the company's management. The letter, called an audit report or opinion letter, expresses the auditor's opinion of the financial statements and whether the company has prepared them in accordance with generally accepted accounting principles. The results of the audit are reflected in the type of opinion letter to be written.
For a company's management, this is the equivalent of a gold star. In rendering an unqualified opinion, the auditor is saying that all financial information that he needed for the examination was available, it was in order and it met all auditing standards. After closing the examination, the auditor was not left with major concerns or serious, unanswered questions.
Unqualified Opinion With Explanatory Language Added
In such a case, the audit is still unqualified, but the auditor felt it was necessary to add certain explanatory language to her report. Doing so is not regarded as a qualification. The auditor could be pointing out some inconsistency in applying accounting principles or mentioning an uncertainty that could have a material impact on the company's financial statements.
An auditor will write this type of letter to management when most of the company's financial statements are in order and meet auditing standards, with the exception of one account or transaction. The account or transaction in question will be named in the opinion letter. The financial information provided to the auditor was not complete or the company's accounting methods do not follow generally accepted accounting principles.
This is a failing grade. The auditor is saying that the financial statements are not accurate or complete. The statements do not present the company's financial position or results in accordance with generally accepted accounting principles. Such an opinion letter is a warning that the financial statements do not give a fair view of the company.
Disclaimer of Opinion
When an auditor is not able to express an opinion, it is generally because the company did not provide sufficient financial information for an audit. Opinion letters with such a disclaimer are relatively rare, but they may be viewed as indications that the company refused to cooperate with the auditor after engaging her services. Such a letter casts doubt on the quality of the company and its management.
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