An external auditor's opinion, also known as audit report, serves as a barometer for a corporation's economic robustness, operational standing and compliance with laws and regulations. A non-profit organization, a government entity or a company listed on a securities exchange needs an unqualified audit report to show business partners that internal controls are adequate and functional.
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Unqualified Audit Report Defined
An unqualified audit report is a "clean bill of health" that an auditor delivers to a corporation. This type of report means the auditor did not detect any significant internal control breakdown during his examination. An auditor typically applies generally accepted auditing standards to ensure that a firm's internal controls are adequate, functional and established in conformity to laws and regulations. A control is a set of instructions that an organization's top leadership establishes to prevent operational losses resulting from error, technological malfunction or fraud.
Unqualified Report Significance
An unqualified audit report is the ultimate goal that a company's senior leadership sets. Having a clean bill of operational and financial health indicates to investors and regulators that senior managers are effective. Other benefits of an unqualified report may include improved relationships with business partners such as lenders, customers and suppliers. For example, a firm that receives an unqualified audit report at the end of the year is more likely to be approved for a loan.
Qualified Audit Report Defined
An auditor issues a qualified opinion when she encounters one of two types of scenarios which do not adhere to generally accepted accounting principles: single deviation from GAAP and scope limitation. As an illustration, an auditor who reviews a bank's financial statements wants to test commission-receivable transactions. She notes that the company records commission fees on trading transactions before the due date, which does not conform to GAAP (single deviation). She also cannot review commission-payable accounts because the firm's computer systems are dysfunctional (scope limitation). The auditor may issue a qualified opinion and explain reasons for the qualification.
Qualified Report Impact
A qualified audit report is not as bad as an adverse opinion, but it may occasionally be detrimental to a corporation. To illustrate, a firm listed on a securities exchange may see a sharp decrease in its stock value if investors do not understand the extent of internal problems noted in a qualified report. Additionally, a lender or a supplier may require more financial guarantees from a company before engaging in future transactions.
Qualified Versus Unqualified Report
A qualified audit report indicates to senior management there are internal control problems in financial reporting mechanisms. Senior leaders may establish corrective measures and ensure that employees follow new measures when performing their duties. Once issues are resolved to the auditor's satisfaction, he may issue an unqualified opinion at the end of the following audit.