What is an Auditor’s Report?

An auditor’s report is a written statement made by an external auditor, stating that party’s opinion on whether a client’s financial statements comply with the applicable accounting framework and are free of material misstatements. This report is included with the client’s financial statements when it issues the statements to third parties. The report is intended to provide assurance to users that the financial statements meet certain minimum reporting standards.

An auditor’s report is not a recommendation regarding whether the issuing entity represents a good investment or credit risk. Instead, it only certifies that the issuer has met certain reporting standards in the construction of its financial statements.

Many third parties require organizations to issue financial statements with an auditor’s report, including creditors, lenders, investors, stock exchanges, and some regulators. In particular, a publicly-held company is required to file an auditor’s report alongside its financial statements when making periodic filings with the Securities and Exchange Commission.

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Contents of an Auditor’s Report

Generally Accepted Auditing Standards mandate that a very specific format be used in the construction of an auditor’s report. The wording is tightly defined, in order to place boundaries around the auditor’s legal liabilities regarding his or her opinion statement. The auditor’s report contains three paragraphs, which are as follows:

The first paragraph states the responsibilities of the auditor and the directors of the client business.
The second paragraph describes the scope of the audit engagement.
The third paragraph contains the auditor’s opinion regarding the client’s financial statements and accompanying disclosures.

Types of Audit Reports

There are three types of opinions that an auditor may issue, depending on the findings resulting from the audit engagement. These opinion types are as follows:

Unqualified opinion. The unqualified opinion states that the client’s financial statements do not contain any material misstatements, and conform to the applicable accounting framework. Most opinions are unqualified, since clients are typically willing to alter their financial statements to meet the auditor’s requirements.
Qualified opinion. The qualified opinion states that a client’s financials are fairly presented, except for a specified issue. The issue typically relates to a limitation on the scope of the audit, so that the auditor was unable to obtain sufficient evidence to verify various aspects of the transactions and reports being audited. Qualified opinions may also be issued if there is a lack of conformity with the applicable accounting framework, inadequate disclosure, uncertainties in estimates, or the statement of cash flows has been omitted.
Adverse opinion. The adverse opinion states that the entity’s financial statements do not fairly represent its results, financial position, and cash flows. The opinion may also be issued if certain required disclosures do not accompany the financial statements, or if the entity has not prepared its financial statements in conformity with the provisions of the applicable accounting framework. The auditor states the reason for this type of opinion within the report. Clients will frequently alter their practices in order to avoid having this type of report issued.

The auditor may also issue a disclaimer of opinion, which is a statement that no opinion is being given regarding the financial statements of the client. This disclaimer may be given for several reasons. For example, the auditor may not have been allowed or been able to complete all planned audit procedures. Or, the client restricted the scope of the examination to such an extent that the auditor was unable to form an opinion. If the client allows the auditor to complete planned work, or rectifies an underlying irregularity, then the auditor may be able to issue an unqualified opinion. Until the auditor issues a replacement opinion, the disclaimer remains in force.

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