Auditor’s Report
An auditor’s report is a formal letter from an independent auditor that expresses an opinion about whether a company’s financial statements are presented fairly and in accordance with generally accepted accounting principles (GAAP). It accompanies a company’s financial statements and helps users—such as lenders, investors, and regulators—assess the reliability of those statements.
Key takeaways
- The auditor’s report states whether financial statements comply with GAAP and are free from material misstatement.
- Public companies must file auditor reports with their financial statements (e.g., in SEC filings).
- The report is about the reliability of the financial statements, not about the investment quality of the company.
- Opinions range from unqualified (clean) to qualified, adverse, or a disclaimer of opinion—each with distinct implications.
How the auditor’s report works
Auditors plan and perform audits to obtain reasonable assurance that financial statements are free from material misstatement, whether caused by error or fraud. The audit examines evidence supporting the amounts and disclosures in the statements, evaluates accounting policies and significant estimates, and assesses overall presentation.
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The auditor’s report summarizes the audit scope, responsibilities, and the auditor’s conclusion. For public companies, this report is typically filed alongside annual reports and SEC filings.
Typical components of an auditor’s report
Most auditor reports follow a standard format established by auditing standards (e.g., GAAS or PCAOB standards). Common elements include:
* Introductory paragraph — identifies the financial statements audited and the responsibilities of management and the auditor.
Scope (basis for opinion) paragraph — describes the nature of the audit and the standards followed.
Opinion paragraph — the auditor’s conclusion about whether the financial statements present fairly, in all material respects, in accordance with GAAP.
* Additional paragraphs — may include emphasis-of-matter, other-matter, or disclosures about separate audits (e.g., internal control). Investors often focus on the opinion paragraph and any explanatory language.
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Types of audit opinions and what they mean
- Unqualified (clean) opinion
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Indicates the auditor believes the financial statements are free from material misstatement and conform to GAAP. This is the most common outcome.
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Qualified opinion
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Issued when the auditor finds material misstatements that are not pervasive, or when the auditor cannot obtain sufficient appropriate audit evidence for certain items but the effects are not widespread. The auditor will describe the issue and the financial statement areas affected.
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Adverse opinion
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Issued when misstatements are both material and pervasive. An adverse opinion signals that the financial statements do not present fairly and can lead regulators, lenders, and investors to reject the statements; it may also trigger legal consequences if fraud or illegal acts are involved.
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Disclaimer of opinion
- Issued when the auditor cannot obtain sufficient audit evidence and cannot form an opinion; the undetected misstatements could be material and pervasive. Common causes include severe scope limitations or lack of auditor independence.
Practical implications and what to watch for
- Read the opinion paragraph carefully—this is the auditor’s bottom line.
- Look for explanatory language such as “going concern,” “material uncertainty,” or emphasis-of-matter paragraphs that highlight specific risks or uncertainties.
- Qualified, adverse, or disclaimer opinions typically prompt further investigation by lenders, investors, or regulators and can affect credit access, stock prices, and management credibility.
- Audits do not guarantee future performance; they provide reasonable (but not absolute) assurance about past-period financial statements.
Example (summary)
A typical unqualified report states that, in the auditor’s opinion, the consolidated financial statements present fairly, in all material respects, the company’s financial position and results of operations in conformity with GAAP. The basis-for-opinion paragraph notes the audit was conducted in accordance with applicable standards (for public companies, PCAOB standards), describes procedures performed, and concludes those procedures provide a reasonable basis for the opinion.
Sources
- U.S. Securities and Exchange Commission — guidance on reading 10-K/10-Q filings and accountants’ involvement
- Public Company Accounting Oversight Board (PCAOB) — auditing standards and guidance
- Company annual reports (example: Starbucks Fiscal 2019 Annual Report)