Audit opinion

What it means

The audit opinion is the concluding statement in the independent auditor's report, expressing whether the financial statements give, in all material respects, a true and fair view of the financial position and results in accordance with the applicable reporting framework. It is the main output of the audit, and readers of the statements look at it first.

There are four types of opinion. An unmodified opinion means the statements are fine. A qualified opinion means they are correct except for a specific material matter. An adverse opinion means the misstatements are material and pervasive and the statements do not give a true and fair view. A disclaimer of opinion is issued when the auditor could not obtain sufficient evidence.

Besides the opinion, the report may include an emphasis of matter paragraph drawing attention to an important item disclosed in the statements without modifying the opinion, such as a material uncertainty about going concern. The report also includes a statement on the annual report if the company prepares one.

How it works in practice

An audit is mandatory for companies exceeding statutory size criteria, such as total assets, net turnover or headcount, and for public interest entities. It can also be voluntary, for example at the request of a bank or investor. The auditor's report is filed together with the financial statements in the register of financial statements.

It is important for a company to talk to its auditor throughout the year, not just at year-end. Resolving contentious issues early, such as inventory valuation, provisions or revenue, reduces the risk of a qualification. At the end of the audit the auditor usually sends management a letter with findings and recommendations for improving controls.

Banks often require audited statements with an unmodified opinion in loan agreements. A qualified or adverse opinion may breach the loan terms and worsen financing conditions. The auditor's report should be available before the general meeting's approval of the financial statements.

What to watch out for

An unmodified opinion does not guarantee there is no fraud or error in the company. Audits work on samples and focus on material misstatement. Smaller errors or well-concealed fraud may go undetected. Responsibility for the accuracy of the statements lies with management, not the auditor.

Pay attention to a going concern paragraph. If the auditor flags a material uncertainty, business partners, banks and credit insurers see it as a warning sign. The company should have a plan for addressing the uncertainty and be able to explain it before the report is published.