Financial statements drawn up from books of accounts are relevant for several stakeholders of any entity. These books of accounts are drawn up by the entity itself. However, certain entities are required to get their books of accounts audited so that external entities can rely on them. Auditing is the function of independently evaluating the books of accounts of an entity to report as to whether they represent a true and fair view of the entity’s financial position. Auditing is carried out by external independent auditors who note their observations in an audit report which is appended along with the issued financial statements.
This article looks at meaning of and differences between the two types of audit reports that an auditor can issue – qualified and unqualified audit report.
Definitions and meanings
Qualified audit report:
A qualified audit report is a report issued by an auditor that reports certain discrepancies in the financial statements prepared by the entity. These discrepancies are typically termed as qualifications. Such report therefore issues a qualified opinion on the true and fair view of the financial position as reported in the financial statements. A qualified opinion may be issued on a single aspect or on multiple aspects of the financial reporting. However, for a qualified audit report to be issued, the discrepancies should not be so severe so as to discredit the financial statements in entirety but only with respect to certain aspects of the financial statements. In severe cases, an adverse and not merely a qualified report is issued.
There can be several types of qualifications noted in a qualified audit report such as:
- Provisions of accounting standard and rules have not been followed by the entity to some extent in preparing its books of accounts and drawing up financial statements.
- Auditors were unable to gather sufficient audit evidence to adequately validate all aspects of the financial statements.
- Inadequate disclosures have been made in the financial statements.
When an auditor issues a qualified audit report, it has to specify the specific matters on which a qualified opinion is given, along with the reasons for the same.
An example of a qualified audit opinion:
‘The Company’s inventories are recorded at cost in the balance sheet at $20,000. Inventories have not been reported at the lower of cost and net realizable value as required by provisions if GAAP or IFRS.
In our opinion and to the best of our information and according to the explanations given to us, except for the impact of above qualified opinion, the financial statements give a true and fair view in compliance with the accounting principles and rules.
The intention of a qualified audit report is to draw attention of stakeholders such as investors, debtors, creditors, bankers etc. to certain discrepancies in the financial statements as observed by the auditors.
Unqualified audit report:
An unqualified audit report is an audit report that confirms that, in the opinion of the auditor, the financial statements of the entity represent a true and fair view of its financial position. An unqualified audit report does not note any discrepancy or any adverse observations with respect to the financial reporting of the entity. Such a audit report is therefore also termed as a clean audit report.
When the auditor is satisfied with audit evidence gathered by him and is satisfied that all accounting standards and rules have been duly followed while preparing books of accounts and reporting in financial statements, he issues an unqualified or clean audit report.
An example of an unqualified audit report:
In our opinion and to the best of our information and according to the explanations given to us, the financial statements give a true and fair view in compliance with the accounting principles and rules.
Difference between qualified and unqualified audit report
The key points of difference between qualified and unqualified audit report have been detailed below:
- A qualified audit report is an audit report that expresses a qualified opinion (to some extent) on the true and fair view as reported in the financial statements.
- An unqualified audit report is an audit report that gives a clean chit to the financial statements representing a true and fair view of the financial position of the entity.
2. Opinion on true and fair view of financial statements
- A qualified audit report gives a subjective clearance to the financial statements representing a true and fair view. This is subject to the matters on which a qualified opinion is expressed.
- An unqualified audit report opines that the financial statements represent a true and fair view without any limitations.
3. Adherence to accounting standards and rules:
- A qualified audit report can raise questions and note discrepancies in application of accounting standards and rules.
- An unqualified audit report concludes that accounting standards and rules have been duly adhered to.
- A qualified audit report is required to substantiate its qualified opinion by stating the audit evidence it has gathered on which the qualified opinion is based.
- An unqualified audit report being without qualifications does not require any such explanation.
5. Confidence to stakeholders
- A qualified audit report impacts the stakeholders as they must study the matters in which a qualified opinion has been given in more detail before relying on the financial statements. For e.g.: – if an audit report gives a qualified opinion on valuation of fixed assets, a bank would have to do its own analysis to determine the worth of the entity’s assets before granting a loan.
- An unqualified audit report gives more confidence to stakeholders as they can rely on the reporting done by the entity in its financial statements.
6. Management action
- A qualified audit report generally calls for management action to take corrective action to the matters in which a qualified opinion has been expressed by auditors.
- An unqualified audit report generally does not require any special management action.
7. Length of audit report
- A qualified audit report can be lengthier as it may create detailed explanations on the qualified opinion/s expressed.
- An unqualified audit report is simpler and less lengthy as no significant observations need to be reported.
Conclusion – qualified vs unqualified audit report:
Both qualified and unqualified audit reports only give opinions on the adherence to accounting standards and the correctness of financial reporting by the entity. Neither of these two reports however comment on the financial health or performance of the company. This is left to stakeholders to gauge by analyzing financial statements and appended audit report.