It is important for you to understand your options when it comes to financial statement preparation and assurance work. Additionally, you will need an understating of the entire process and the various forms of opinions presented in a final audit report to properly interpret the results. To help you translate the findings, this blog reviews common audit terminology.

TYPES OF AUDIT ENGAGEMENTS 

When you engage an auditor, you typically want them to prepare financial statements or provide some level of assurance on the financial statements. The common forms of assurance work are a compilation, a review, or a full audit.

1. COMPILATION

A compilation is just that—putting together a summary of your financial statements based on existing financial data. A certified public accountant (CPA) will review your financial statements but will not perform any tests or examine internal controls.

When performing a compilation, the CPA takes client records and puts them into a standard financial statement format. Even though they won’t verify the accuracy of those records, the CPA will interpret the financial statements in light of the reporting framework used. The CPA will also check whether the statements are appropriate in form and free from obvious significant misstatements or errors. 

A compilation is the most basic of the three types of assurance work. The CPA doesn’t provide any assurance since they don’t perform any testing or comparisons. Also, the CPA isn’t required to be independent for a compilation, but they must disclose any lack of independence in the report.

Due to its informal nature, a compilation is suitable for business owners or managers who only need their records to be distilled and simplified into a financial statement format without any professional opinion or assurance. Compilations are also useful when sourcing small amounts of financing. 

2. REVIEW

A review is a type of assurance arrangement where a CPA performs inquiries and analytical procedures to check financial records’ accuracy with limited assurance. Unlike a compilation, a review requires the CPA to be independent.

The CPA also needs to understand your business, the industry in which you operate, its accounting principles, and general practices. This knowledge helps them identify areas where errors and misstatements are more likely to arise.

Because a review is more in-depth, it will have a narrower scope. However, the CPA is not required to gain an understanding of internal controls, assess fraud risk, or test accounting records through inspection, observation, and confirmation. 

A review is most appropriate for business owners or managers who need greater confidence in their financial statements to help them make accurate decisions. It’s also useful as part of due diligence when obtaining significant financing to support business growth.

3. AUDIT 

Compared to compilations and reviews, audits provide the highest level of assurance. They examine all source documentation when compiling financial statements, including invoices, bank statements and checks. An audit also involves testing and assessing financial reporting practices and controls to determine the level of fraud risk. 

All amounts and disclosures are verified and supported with evidence through physical inspection, observation, third-party confirmations and analytical procedures. If you have inventory, it will need to be counted and verified as of year-end.

All of this provides “reasonable assurance” on the accuracy and reliability of the financial statements. Reasonable assurance is defined as a high level of assurance, but not absolute assurance, that the financial statements are free from material misstatements. 

As with a review, the CPA is required to be independent when performing an audit. An audit is necessary when businesses need to obtain significant financing. It can also be performed when seeking external investors, preparing to sell or merge the company or for the board of directors.

TYPES OF AUDIT OPINIONS

After the auditor has completed an Audit engagement, they will give one of four professional opinions. That opinion will depend on their findings and greatly impacts how shareholders, investors, lenders, and other stakeholders perceive your company.

1. UNQUALIFIED OPINION

An unqualified opinion is a clean report with no adverse comments or disclaimers relating to the findings obtained during the auditing process. Every company expects to receive such a report because it indicates that the auditor was satisfied with its financial reporting.

Such a report also shows that the CPA believes that the company’s accounting operations comply with accepted governance principles and applicable laws. Investors and other stakeholders accept such a report to mean no financial misstatements or errors.

2. QUALIFIED OPINION 

When an auditor is not confident with one or more processes or transactions, a qualified opinion is given. This prevents them from issuing a clean report. Among investors and other stakeholders, a qualified opinion indicates that the company’s financial status is questionable.

Such a report is usually given when an auditor feels that the company’s financials are not being presented in accordance with generally accepted accounting principles (GAAP). The final report is written like a clean report, but with reasons why a clean report couldn’t be given. 

3. DISCLAIMER OF OPINION 

An auditor gives a disclaimer of opinion report when they want to avoid giving a professional opinion and distance themselves from the financial statements. This is mostly due to a lack of transparency or interference in the reporting and auditing process.

An auditor may give a disclaimer of opinion report if they felt the company failed to provide access to data, gave unsatisfactory explanations, or prevented the auditor from performing observations and analytical procedures. It means they couldn’t find evidence to show that the company was performing accurate financial reporting. Such a report is seen as a critical stance on the company’s financial status and paints a negative picture of its performance and management.

4. ADVERSE OPINION 

An adverse opinion is the worst audit report a company can receive. It is given when the auditor is not at all satisfied with the financial statements, especially when they discover a high level of misstatements or irregularities.

An adverse opinion tells investors, the public, and the government not to trust the company due to its unreliable financial statements. It is a major red flag and indicates that the financial statements have a potential for fraud. 

Such a report also indicates that company records have not been prepared in accordance with GAAP. The report pressures the company to adopt accepted financial reporting practices for clarity, accuracy, and transparency.

HOW TO GET UNQUALIFIED AUDIT REPORTS

Any report other than a clean, unqualified audit report could instantly damage your company’s reputation. That’s why good quality accounting practices and internal controls are crucial. If you have any questions, please contact us or learn more about our audit and assurance services.