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The role of the auditor in the American economy
Other types of auditors' reports
The form of auditors' reports discussed in this chapter is called a standard unqualified opinion. Such a report may be regarded as a "clean bill of health" issued by the auditors. An unqualified opinion denotes that the examination was adequate in scope and that the financial statements present fairly the financial position and results of operations in conformity with generally accepted accounting principles. Under these circumstances, the auditors are taking no exceptions and inserting no qualifications in the report.
An unqualified opinion is the type of report the client wants and also the type auditors prefer to issue. In some audits, however, the circumstances do not permit the auditors to give their unqualified opinion on the financial statements. As alternatives to an unqualified opinion, auditors may issue a qualified opinion, an adverse opinion, or a disclaimer of opinion. In some situations, the auditors also include additional "explanatory language" in the report.
The auditors issue a qualified opinion on financial statements when there is some limitation on their examination, or when one or more items in the financial statements are not presented in accordance with generally accepted accounting principles. The limitation or exception must be significant but not so material as to overshadow an overall opinion on the financial statements.
An adverse opinion states that the financial statements are not fairly presented. In practice an adverse opinion is rare, because it would be of little use to the client. If the financial statements are so deficient as to warrant an adverse opinion by the auditors, this situation will be discussed between the auditors and the client's management. The management probably will agree to make the changes necessary tot avoid an adverse opinion or will decide to terminate the audit engagement and thus avoid paying additional audit fees.
The auditors will issue a disclaimer of opinion if they are unable to determine the overall fairness of the financial statements. This type of report results from very significant limitations in the scope of the auditors' examination or limitations that are imposed by the client.
It is important for users of financial statements to be informed of certain matters, such as material uncertainties that may affect the financial statements, changes in accounting principles in relation to the prior year, or the fact that another audit firm is responsible for a significant aspect of the audit. The auditors direct the users' attention to such matters by adding explanatory language to their report. This additional language
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