A standard unqualified audit report indicates that the opinion expressed is "clean" and management's

assertions in regard to the financial statements are usually found to be in conformance with generally
accepted accounting principles. The standard unqualified audit report is the most common type of
audit report. Both the auditor and the client desire the issuance of an unqualified report, because it
indicates that "the auditor has no reservations about the fairness of presentation" (Rittenberg &
Schwieger, 2005). An unqualified report indicates that the "audit was performed in accordance with
generally accepted auditing standards (for nonpublic companies) or in accordance with the standards
of the PCAOB (for public

Unqualified Opinion report

The most frequent type of report is referred to as the Unqualified Opinion, and is regarded
by many as the equivalent of a “clean bill of health” to a patient,[2] which has led many to call
it the Clean Opinion, but in reality it is not a clean bill of health[3]. This type of report is
issued by an auditor when the financial statements presented are free from material
misstatements and are represented fairly in accordance with the Generally Accepted
Accounting Principles (GAAP), which in other words means that the company’s financial
condition, position, and operations are fairly presented in the financial statements. It is the
best type of report an auditee may receive from an external auditor

Qualified Opinion report

A Qualified Opinion report is issued when the auditor encountered one of two types of
situations which do not comply with generally accepted accounting principles, however the
rest of the financial statements are fairly presented. This type of opinion is very similar to an
unqualified or “clean opinion”, but the report states that the financial statements are fairly
presented with a certain exception which is otherwise misstated. The two types of situations
which would cause an auditor to issue this opinion over the Unqualified opinion are:

 Single deviation from GAAP – this type of qualification occurs when one or more
areas of the financial statements do not conform with GAAP (e.g. are misstated), but
do not affect the rest of the financial statements from being fairly presented when
taken as a whole. Examples of this include a company dedicated to a retail business
that did not correctly calculate the depreciation expense of its building. Even if this
expense is considered material, since the rest of the financial statements do conform
with GAAP, then the auditor qualifies the opinion by describing the depreciation
misstatement in the report and continues to issue a clean opinion on the rest of the
financial statements.

 Limitation of scope - this type of qualification occurs when the auditor could not audit
one or more areas of the financial statements, and although they could not be verified,
the rest of the financial statements were audited and they conform GAAP. Examples
 of this include an auditor not being able to observe and test a company’s inventory of
goods. If the auditor audited the rest of the financial statements and is reasonably sure
that they conform with GAAP, then the auditor simply states that the financial
statements are fairly presented, with the exception of the inventory which could not be
audited.

The wording of the qualified report is very similar to the Unqualified opinion, but an
explanatory paragraph is added to explain the reasons for the qualification after the scope
paragraph but before the opinion paragraph. The introductory paragraph is left exactly the
same as in the unqualified opinion, while the scope and the opinion paragraphs receive a
slight modification in line with the qualification in the explanatory paragraph.

The scope paragraph is edited to include the following phrase in the first sentence, so that the
user may be immediately aware of the qualification. This placement also informs the user
that, except for the qualification, the rest of the audit was performed without qualifications

Adverse Opinion report

An Adverse Opinion is issued when the auditor determines that the financial statements of
an auditee are materially misstated and, when considered as a whole, do not conform with
GAAP. It is considered the opposite of an unqualified or clean opinion, essentially stating
that the information contained is materially incorrect, unreliable, and inaccurate in order to
assess the auditee’s financial position and results of operations. Investors, lending
institutions, and governments very rarely accept an auditee’s financial statements if the
auditor issued an adverse opinion, and usually request the auditee to correct the financial
statements and obtain another audit report.

Generally, an adverse opinion is only given if the financial statements pervasively differ from
GAAP.[5] An example of such a situation would be failure of a company to consolidate a
material subsidiary.

The wording of the adverse report is similar to the qualified report. The scope paragraph is
modified accordingly and an explanatory paragraph is added to explain the reason for the
adverse opinion after the scope paragraph but before the opinion paragraph. However, the
most significant change in the adverse report from the qualified report is in the opinion
paragraph, where the auditor clearly states that the financial statements are not in accordance
with GAAP, which means that they, as a whole, are unreliable, inaccurate, and do not present
a fair view of the auditee’s position and operations.
 “In our opinion, because of the situations mentioned above (in the explanatory paragraph),
the financial statements referred to in the first paragraph do not present fairly, in all
material respects, the financial position of…

[edit] Disclaimer of Opinion report

A Disclaimer of Opinion, commonly referred to simply as a Disclaimer, is issued when the

auditor could not form, and consequently refuses to present, an opinion on the financial
statements. This type of report is issued when the auditor tried to audit an entity but could not
complete the work due to various reasons and does not issue an opinion. The disclaimer of
opinion report can be traced back to 1949, when the Statement on Auditing Procedure No.
23: Recommendation Made To Clarify Accountant’s Representations When Opinion Is Not
Expressed was published in order to provide guidance to auditors in presenting a disclaimer.
[6]

Statements on Auditing Standards (SAS) provide certain situations where a disclaimer of

opinion may be appropriate:

 A lack of independence, or material conflict(s) of interest, exist between the auditor and the
auditee (SAS No. 26)
 There are significant scope limitations, whether intentional or not, which hinder the
auditor’s work in obtaining evidence and performing procedures (SAS No. 58);
 There is a substantial doubt about the auditee’s ability to continue as a going concern or, in
other words, continue operating (SAS No. 59)
 There are significant uncertainties within the auditee (SAS No. 79).

Although this type of opinion is rarely used,[6] the most common examples where disclaimers
are issued include audits where the auditee willfully hides or refuses to provide evidence and
information to the auditor in significant areas of the financial statements, where the auditee is
facing significant legal and litigation issues in which the outcome is uncertain (usually
government investigations), and where the auditee has going concern issues (the auditee may
not continue operating in the near future).[6] Investors, lending institutions, and governments
typically reject an auditee’s financial statements if the auditor disclaimed an opinion, and will
request the auditee to correct the situations the auditor mentioned and obtain another audit
report.

A disclaimer of opinion differs substantially from the rest of the auditor’s reports because it
provides very little information regarding the audit itself, and includes an explanatory
paragraph stating the reasons for the disclaimer. Although the report still contains the
letterhead, the auditee’s name and address, the auditor’s signature and address, and the
report’s issuance date, every other paragraph is modified extensively, and the scope
paragraph is entirely omitted since the auditor is basically stating that an audit could not be
realized.

In the introductory paragraph, the first phrase changes from “We have audited” to “We were
engaged to audit” in order to let the user know that the auditee commissioned an audit, but
does not mention that the auditor necessarily completed the audit. Additionally, since the
audit was not completely and/or adequately performed, the auditor refuses to accept any
responsibility by omitting the last sentence of the paragraph. The scope paragraph is omitted
in its entirety since, effectively, no audit was performed. Similar to the qualified and the
adverse opinions, the auditor must briefly discuss the situations for the disclaimer in an
explanatory paragraph. Finally, the opinion paragraph changes completely, stating that an
opinion could not be formed and is not expressed because of the situations mentioned in the
previous paragraphs.

The following is a draft of the three main paragraphs of a disclaimer of opinion because of
inadequate accounting records of an auditee, which is considered a significant scope of
limitation:

We were engaged to audit the accompanying balance sheet of ABC Company, Inc. (the
“Company”) as of December 31, 20XX and the related statements of income and cash flows
for the year then ended. These financial statements are the responsibility of the Company's
management.

The Company does not maintain adequate accounting records to provide sufficient
information for the preparation of the basic financial statements. The Company’s accounting
records do not constitute a double-entry system which can produce financial statements.

Because of the significance of the matters discussed in the preceding paragraphs, the scope of
our work was not sufficient to enable us to express, and we do not express, an opinion of the
financial statements referred to in the first paragraph.

[edit] Auditor’s report on internal controls of public companies

See also: Sarbanes-Oxley Act

Following the enactment of the Sarbanes-Oxley Act of 2002, the Public Company
Accounting Oversight Board (PCAOB) was established in order to monitor, regulate, inspect,
and discipline audit and public accounting firms of public companies. The PCAOB Auditing
Standards No. 2 now requires auditors of public companies to include an additional
disclosures in the opinion report regarding the auditee’s internal controls, and to opine about
the company’s and auditor’s assessment on the company’s internal controls over financial
reporting. These new requirements are commonly referred to as the COSO Opinion.

The auditor’s report is modified to include all necessary disclosures by either presenting the
report subsequent to the report on the financial statements, or combining both reports into one
auditor’s report. The following is an example of the former version of adding a separate
report immediately after the auditor’s report on financial statements.

Internal control over financial reporting

We have also audited management’s assessment, included in the accompanying

Management’s Annual Report on Internal Control Over Financial Reporting, that the
Company maintained effective internal control over financial reporting as of December 31,
20XX, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).The
Company’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on management’s assessment
and on the effectiveness of the Company’s internal control over financial reporting based on
our audit.We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide

reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial
statements.

Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that ABC Company maintained effective internal
control over financial reporting as of December 31, 20XX, is fairly stated, in all material
respects, based on criteria established in Internal Control—Integrated Framework issued by
COSO. Furthermore, in our opinion, ABC Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 20XX, based on criteria
established in Internal Control—Integrated Framework issued by COSO.

[edit] Going concern

Going concern is a term [2] which means that an entity will continue to operate in the near
future which is generally more than next 12 months, so long as it generates or obtains enough
resources to operate. If the auditee is not a going concern, it means that it is either dissolved,
bankrupt, shutdown, etc. Auditors are required to consider the going concern of an auditee
before issuing a report.[7] If the auditee is a going concern, the auditor does not modify his/her
report in any way. However, if the auditor considers that the auditee is not a going concern,
or will not be a going concern in the near future, then the auditor is required to include an
explanatory paragraph before the opinion paragraph or following the opinion papragraph, in
the audit report explaining the situation,[7][8] which is commonly referred to as the going
concern disclosure. Such as opinion is called an "unqualified modified opinion".

Unfortunately, many auditors are increasingly reluctant to include this disclosure in their
opinions, since it is considered a “self-fulfilling prophesy” by some.[7] This is because a
disclosure for a lack of going concern is viewed negatively by investors, lending institutions,
and credit agencies, and therefore reduces the chance that the auditee may obtain the capital
or borrowing it needs to survive once the disclosure is made. If this situation occurs, the
auditee is more likely to stop being a going concern while the auditor loses potential future
audit engagements, and so the auditor may be pressured to avoid including a going concern
disclosure. In a study performed on 2001 bankruptcies, nearly half (48%) of selected public
companies who faced bankruptcy in 2001 did not have a “going concern disclosure” in the
previous auditor’s reports.[7] Additionally, 12 of the 20 largest bankruptcies in U.S. history
occurred between 2001 and 2002 and none of them had a “going concern disclosure” in their
previous auditor’s report.[7]

As for the actual wording of the auditor’s report, when a lack of going concern is determined
by the auditor, the disclosure paragraph should state the situation, state the auditor’s
determination, and state the auditee’s plan to correct the situation. The disclosure paragraph
should immediately follow the opinion paragraph.

The following is the most widely used format of the paragraph which, in this case, deals with
a company that has recurring losses:[9]

The accompanying financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note (X) to the financial statements, the
Company has suffered recurring losses and has a net capital deficiency. These conditions
raise substantial doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note (X). The financial statements do not include
any adjustments relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the Company be unable to
continue as a going concern.mean while

[edit] Other explanatory information and paragraphs

Although the auditor reports mentioned above are the standard reports for financial statement
audits, the auditor may add additional information to the report if it is deemed necessary
without changing the overall opinion of the report. Usually, this additional information is
included after the opinion paragraph, although some situations require that the additional
information be included in paragraphs before the opinion paragraph. The most frequent
paragraphs include:

 Limiting distribution of the report – In some occasions, the audit report is restricted to a
specified user and the auditor includes this restriction in the report, such as a report for
financial statements made in cash basis which are prepared for tax purposes only, financial
statements for a wholly-owned subsidiary whose sole user of its financial statements is its
parent company, etc.
 Additional or supplemental information – Certain auditees include additional and/or
supplemental information with their financial statements which is not directly related to the
financial statements. Examples include governments that incorporate health, crime, and
education statistics along with the financial statement reports for the general public to read
and use. Since it is not directly related to the audit of the financial statements, the auditor
includes a brief disclaimer paragraph to state that the auditor’s report only applies to the
financial statements and its respective notes.

 Certain audit work performed by another auditor – Sometimes an auditee requires that two
or more auditors perform audits on its operations in order to obtain a more effective audit.
This usually occurs in large governments and corporations who have certain dependencies,
subsidiaries, or other similar components which require an auditor different from its main
auditor to perform an audit on the original auditee’s component due to size, time, location,
and/or technical constraints. When the main auditor has to rely on another auditor’s work,
the main auditor may either accept responsibility for the component’s information and not
modify the audit report, or may chose to disclaim the audit on the specific component,
stating that the main auditor did not audit the component, that another auditor audited the
component, that the component’s audited information is therefore the responsibility of
another auditor, and that the main auditor is simply including it in the original auditee’s
information. If used, this disclaimer is usually included in the introductory paragraph.

o 1.1 Unqualified Opinion report

o 1.2 Qualified Opinion report
o 1.3 Adverse Opinion report
o 1.4 Disclaimer of Opinion report
o 1.5 Auditor’s report on internal controls of public companies
o 1.6 Going concern
o 1.7 Other explanatory information and paragraphs
o 1.8 Auditor’s reports on financial statements in different countries