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The Difference Between a Qualified &

Unqualified Audit Report
 Small Business

 Accounting & Bookkeeping

 Audit Reports

ByJulie DavorenUpdated March 08, 2019

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In an audit engagement, the auditor gives his opinion on the financial information
disclosed by your business. The auditor’s report is an integral element of your
business’s audited financial statement. At the culmination of the audit engagement,
the auditor expresses his opinion in the auditor’s report, which can be qualified or
unqualified.

Audit Report Layout

The auditor’s report begins with a brief introduction about the audit engagement.
Thereafter, the auditor’s report is divided in to three major sections. In the first section,
the auditor explains that preparing the financial statements and maintaining sound
internal controls is management’s responsibility.

In the second section, the auditor explains its own responsibilities, duties and rights
regarding the engagement. Here, the auditor emphasizes the nature of the audit and
states that the auditor only examines internal controls and accounting records on a
sample basis. In the third section, the auditor gives his opinion on the financial
statements.

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An Unqualified Report
In an unqualified report, the auditors conclude that the financial statements of your
business present fairly its affairs in all material aspects. The opinion embodies the
assumptions that your business observed compliance with generally accepted
accounting principles and statutory requirements. Also known as a clean report, such
a report implies that any changes in the accounting policies, their application and
effects, are adequately determined and divulged.

This opinion does not tell that your business is in good economic health. It merely
states that your financial report is transparent and thorough and has not hidden
important facts.

A Qualified Report
A qualified report is one in which the auditor concludes that most matters have been
dealt with adequately, except for a few issues. An auditor’s report is qualified when
there is either a limitation of scope in the auditor’s work, or when there is a
disagreement with management regarding application, acceptability or adequacy of
accounting policies. For auditors an issue must be material or financially worth
consideration to qualify a report. The issue should not be pervasive, that is, the issue
should not misrepresent the factual financial position.

If issues are material and pervasive, the auditor issues a disclaimer or adverse
opinion. A qualified audit report does not mean that your business is suffering, and it
doesn't mean that your financial statement isn't transparent. It merely reflects the
auditor’s inability to give a clean report.

Other Differences in the Opinion Paragraph

Another difference lies in the wording of the opinion paragraph of an auditor’s report.
When issuing an unqualified report the auditor might write, “In our opinion, the
financial statements give a true and fair view of the financial position of XYZ
Enterprises as of ….” Conversely, the opinion paragraph in a qualified report might
begin with, “In our opinion, except for the effects of the following adjustments, if any,
as might have been determined to be necessary had we been able to perform tests on
companies stocks, the financial statements give a true and fair view of the financial
position of XYZ Enterprises as …. “

Notice that there are “exceptions” in the opinion paragraph of the qualified report.

Impact of Auditors' Opinions

As a businessperson, you should keep in mind that there are deep-held perceptions
about auditors' opinions. Banks, investors and regulators such as the IRS rely on
audited financial statements for their analytical needs. Stakeholders such as banks
and investors view qualified audit report unfavorably. Therefore, you should hope to
receive an unqualified audit report because it gives a positive impression of your
business.

For example, if your business was issued a qualified audit report on inventory matters,
your bank is more likely to demand further details about your inventory before issuing
credit to you.

REFERENCES

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