What is the difference between clean and qualified audit report?

What Is a Qualified Opinion?

A qualified opinion is a statement issued in an auditor's report that accompanies a company's audited financial statements. It is an auditor's opinion that suggests the financial information provided by a company was limited in scope or there was a material issue with regard to the application of generally accepted accounting principles (GAAP)—but one that is not pervasive.

Qualified opinions may also be issued if a company has inadequate disclosures in the footnotes to the financial statements.

Key Takeaways

• A qualified opinion is one of four possible auditor's opinions on a company's financial statement.
• The other auditor's opinions are unqualified, adverse, or a disclaimer of opinion.
• A qualified opinion indicates that there was either a scope limitation, an issue discovered in the audit of the financials that were not pervasive, or an inadequate footnote disclosure.
• A qualified opinion is an auditor's opinion that the financials are fairly presented, with the exception of a specified area.
• Unlike an adverse or disclaimer of opinion, a qualified opinion is generally still acceptable to lenders, creditors, and investors.
• The auditor's opinion is usually found in the third and final section of an auditor’s report.

Understanding a Qualified Opinion

A qualified opinion may be given when a company’s financial records have not followed GAAP in all financial transactions, but only if the deviation from GAAP is not pervasive. The term "pervasive" can be interpreted differently based on an auditor's professional judgment. However, to not be pervasive, the misstatement must not misrepresent the factual financial position of the company as a whole and should not have an effect on the decision-making of financial statement users.

A qualified opinion may also be given due to a limitation of scope in which the auditor was not able to gather sufficient evidence to support various aspects of the financial statements. Without sufficient verification of transactions, an unqualified opinion may not be given. Inadequate disclosures in the notes to the financial statements, estimation uncertainty, or the lack of a statement of cash flows are also grounds for a qualified opinion.

How a Qualified Opinion Is Represented

A qualified opinion is listed in the third and final section of an auditor’s report. The first section of the report outlines management’s responsibilities in regards to preparing the financial statements and maintaining internal controls. The second section outlines the auditor’s responsibilities. In the third section, an opinion is given by the independent auditor regarding the company’s internal controls and accounting records. The opinion may be unqualified, qualified, adverse, or a disclaimer of opinion.

A qualified opinion states that the financial statements of a corporate client are, with the exception of a specified area, fairly presented. Auditors typically qualify the auditor's report with a statement such as "except for the following," when they have insufficient information to verify certain aspects of the transactions and reports being audited.

A qualified opinion is not so severe that it indicates that a business is doing poorly or that a company has hidden or falsified information, but rather, that the auditor simply cannot give an issue free report. The auditor may specify that they believe the overall audit to be true and factual but will specify the area that they believe is the issue.

Qualified Opinion vs. Other Opinions

A qualified opinion is a reflection of the auditor’s inability to give an unqualified, or clean, audit opinion. An unqualified opinion is issued if the financial statements are presumed to be free from material misstatements. It is the most common type of auditor's opinion.

If the issues discovered during the audit result in material misstatements that would affect the decision making of the financial statement users, the opinion is escalated to an adverse opinion. The adverse opinion results in the company needing to restate and complete another audit of its financial statements. A qualified opinion is still acceptable to most lenders, creditors, and investors.

In the event that the auditor is unable to complete the audit report due to the absence of financial records or insufficient cooperation from management, the auditor issues a disclaimer of opinion. This is an indication that no opinion over the financial statements was able to be determined.

THE THREE ASPECTS WE AUDIT 

The audit of financial statements
The financial statements submitted for auditing must be free from material misstatements. Misstatements refer to incorrect or omitted information in the financial statements. Examples include the incorrect or incomplete classification of transactions, or incorrect values placed on assets, liabilities or financial obligations and commitments.

The objective of an audit of financial statements is to express an audit opinion on whether the financial statements fairly present the financial position of auditees at financial year-end and the results of their operations for that financial year.

We can express one of the following audit opinions:

1. CLEAN AUDIT OUTCOME:
   The financial statements are free from material misstatements (in other words, a financially unqualified audit opinion) and there are no material findings on reporting on performance objectives or non-compliance with legislation.
2. FINANCIALLY UNQUALIFIED AUDIT OPINION:
   The financial statements contain no material misstatements. Unless we express a clean audit outcome, findings have been raised on either reporting on predetermined objectives or non-compliance with legislation, or both these aspects.
3. QUALIFIED AUDIT OPINION:
   The financial statements contain material misstatements in specific amounts, or there is insufficient evidence for us to conclude that specific amounts included in the financial statements are not materially misstated.
4. ADVERSE AUDIT OPINION:
   The financial statements contain material misstatements that are not confined to specific amounts, or the misstatements represent a substantial portion of the financial statements.
5. DISCLAIMER OF AUDIT OPINION:
   The auditee provided insufficient evidence in the form of documentation on which to base an audit opinion. The lack of sufficient evidence is not confined to specific amounts, or represents a substantial portion of the information contained in the financial statements.

Apart from auditing the financial statements, our other reporting responsibilities include auditing auditees’ reporting on their predetermined objectives and auditing auditees’ compliance with legislation.

The audit of reporting on predetermined objectives
Legislation requires auditees to report against their predetermined objectives and to submit such annual performance reports for auditing. The objective of our audit of predetermined objectives is to determine whether the reported performance against auditees’ predetermined objectives in the annual performance report is useful and reliable in all material respects, based on predetermined criteria. This means that the reported performance information must be valid, accurate and complete.

Since the 2005-06 financial year, we have been phasing in the auditing of predetermined objectives and explaining to leaders within all spheres of government the importance of lending credibility to published service delivery information through the auditing thereof. Since the 2009-10 financial year, we have included a separate audit conclusion, based on the results of the audit on predetermined objectives, in management reports. However, these conclusions have not yet been elevated to the level of the audit report.

The audit of compliance with legislation
Legislation sets out the activities that auditees are charged with in serving the citizens and stipulate any limits or restrictions on such activities, the overall objectives to be achieved, and how due process rights of individual citizens are to be protected. Auditees are subject to legislation such as the Municipal Finance Management Act and the Municipal Systems Act, of which the objectives are proper financial management and performance management, transparency, accountability, stewardship and good governance.

The Public Audit Act requires us to audit compliance with legislation applicable to financial matters, financial management and other related matters each year. Material instances of non-compliance are reported in the audit report. To enhance accountability, auditees must identify and fully disclose any unauthorised, irregular as well as fruitless and wasteful expenditure incurred. In most part, such expenditure is incurred as a result of non-compliance with legislation.

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