Auditor’s Opinion

An auditor (certified public accountant) conducts an independent examination of the accounting information presented
by the business and issues a report thereon. An auditor’s report is the formal statement of the auditor’s opinion of the
financial statements after conducting an audit. Audit opinions are classified as follows:

1. UNQUALIFIED OPINION. This opinion states that the financial statements present fairly, in all material respects,
the financial position, results of operations, and cash flows of the entity, in conformity with generally accepted
accounting principles.

2. QUALIFIED OPINION. A qualified opinion states that, except for the effects of the matter(s) to which the
qualification relates, the financial statements present fairly, in all material respects, the financial position, results of
operations, and cash flows of the entity, in conformity with generally accepted accounting principles.

3. ADVERSE OPINION. This opinion states that the financial statements do not present fairly the financial position,
results of operations, and cash flows of the entity, in conformity with generally accepted accounting principles.

4. DISCLAIMER OF OPINION. A disclaimer of opinion states that the auditor does not express an opinion on the
financial statements. A disclaimer of opinion is rendered when the auditor has not performed an audit sufficient in scope
to form an opinion.

Since the passage of Sarbanes-Oxley, the form of the audit opinion can vary substantially. Private companies are not
under Sarbanes-Oxley, but an increasing number of private companies are complying with parts of the law. Some of the
reasons for private companies to follow the law are the following:

1. Owners hope to sell the company or take it public.

2. Directors who sit on public company boards see the law’s benefits.
3. Executives believe strong internal controls will improve efficiency.
4. Customers require strong internal controls.
5. Lenders are more likely to approve loans.
In some cases, outside accountants are associated with financial statements when they have performed less than an audit.
The accountant’s report then indicates that the financial statements have been reviewed or compiled.

A review consists principally of inquiries made to company personnel and analytical procedures applied to financial
data. It has substantially less scope than an examination in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, the
accountant does not express an opinion. The accountant’s report will indicate that the accountants are not aware of any
material modifications that should be made to the financial statements in order for them to be in conformity with GAAP;
or the report will indicate departures from GAAP. A departure from GAAP may result from using one or more
accounting principles without reasonable justification, the omission of necessary note disclosures, or the omission of the
statement of cash flows.

In general, the reliance that can be placed on financial statements accompanied by an accountant’s review report is
substantially less than those accompanied by an audit report. Remember that the accountant’s report does not express an
opinion on reviewed financial statements.

When the outside accountant presents only financial information as provided by management, he or she is said to have
compiled the financial statements. The compilation report states that the accountant has not audited or reviewed the
financial statements. Therefore, the accountant does not express an opinion or any other form of assurance about them. If
an accountant performs a compilation and becomes aware of deficiencies in the statements, then the accountant’s report
characterizes the deficiencies as follows:

• Omission of substantially all disclosures

• Omission of statement of cash flows
• Accounting principles not generally accepted

Sometimes financial statements are presented without an accompanying accountant’s report. This means that the
statements have not been audited, reviewed, or compiled. Such statements are solely the representation of management.