Abstract 3
Auditors’ Responsibilities and Potential Liabilities 4
Types of Audit Reports and Underlying Reasons for Their Issuance 5
Unqualified Opinion 6
Qualified Opinion Report 7
Adverse Opinion Report 7
Disclaimer of Opinion Report 8
References 9
Abstract
This research paper is dedicated to make an important discussion about the different types of reports issued by an external auditor to form an opinion or judgment about the reliability and accuracy of the financial records and statements of the audit client. Generally, auditors issue four types of auditor reports depending on specific situations. Also, different responsibilities of an external auditor are also highlighted while forming an opinion or judgment for the benefit of all stakeholders to the audit client. In the same manner, the liabilities of an external auditor which he must fulfil are also accounted for. It is found that auditors have a prime responsibility to form professional and true opinion for passing fair judgment and reasonable assurance. Similarly, they must maintain stakeholders’ and clients’ trust. In case of negligent auditing, auditors have the liability to face legal proceedings and compensate the audit client and its stakeholders for any investment loss.
Auditor’s Responsibilities and Liabilities in Issuing Different Audit Opinion Reports
Auditors’ Responsibilities and Potential Liabilities
When an auditor is engaged to perform an independent examination of the financial records and statements of its audit client, it is the core responsibility of an auditor to form a realistic opinion or judgment. Such an opinion should concern the reliability and accuracy of the financial records of the audit client. An auditor has a responsibility to ensure all stakeholders in a particular report or opinion if the financial statements of an organization are accurate, reliable and free from material misstatements due to fraudulent activity, error or any wrongdoing etc .
An auditor, while presenting an audit opinion or judgment, has a prime responsibility to ensure that all financial records and statements of the audit client are prepared in accordance with Generally Accepted Accounting Principles (GAAP). In other words, auditors should assume a responsibility to confirm if all the financial statements are prepared with strict compliance with statutory and regulatory requirements as well as relevant accounting standards/principles.
In forming an audit opinion, external auditors have certain liabilities. Stakeholders of an organization appoint an auditor to independently examine the financial records with full responsibility and strict compliance to auditing as well as professional standards. This is because internal and external stakeholders rely on auditor’s report and opinion for making investment as well as other business decisions. If an auditor forms an opinion in a negligent manner and fails to perform professional duties as expected, it is quite damaging to the audit client and its stakeholders.
If decisions are based on negligent audit opinion or judgment, the auditor is liable to face lawsuits or criminal and civil procedures. An auditor, therefore, is liable to maintain the trust of all stakeholders as well as the audit client. He should perform all audit procedures in a professional manner with a liability to form reasonable assurance on the accuracy and reliability of the financial statements.
In case, an auditor forms a false audit opinion on the accuracy and reliability of financial records due to professional negligence, the audit firm is bound to compensate stakeholders for any investment loss. In other words, if stakeholders make investment decision based on false audit opinion, any loss incurred by them would have to be borne by the audit firm. Moreover, an auditor is liable to report sensitive matters in case it is found that any account balance is either understated or overstated. Apart from this issue, wrongdoings and fraudulent activities must be reported to the management which is another liability of an auditor .
Types of Audit Reports and Underlying Reasons for Their Issuance
An auditor’s report represents a disclaimer where an independent body, internal and external, passes a judgment about the reliability and accuracy of the financial records as well as statements of the audit client as a result of independent examination. This is a report on the basis of which different stakeholders of the audit client, probably an organization, make investment decisions.
An auditor’s report stands as one of the essential tools on the basis of which financial information is not only reported but it is also made available to different internal and external stakeholders. An auditor’s report is issued by independent auditors so as to provide “reasonable assurance” to different stakeholders as they rely on auditor’s judgment and opinion to make investment decisions in the form of loans, common shares holding as well as enhancement of corporate image in the marketplace .
An auditor’s report is not an evaluation but an opinion or judgment passed by external auditors concerning the reliability, accuracy and transparency of financial records of an organization. To pass a true judgment, auditors usually issue four types of audit reports to confirm if the financial information presented in statements is correct and do not contain any material misstatement . The four common types of audit reports, issued in different circumstances, are summarized as follows:
Unqualified Opinion
Auditors pass an “unqualified” opinion when they conclude in their report that the financial records of their audit client give a true and fair view of all financial information as well as confirm that financial statements comply with the financial reporting framework to present and prepare financial statements.
Auditors issue this type of report when it is confirmed that the reported financial statements are fair, free from material misstatements and prepared in strict compliance with the Generally Accepted Accounting Principles (GAAP). In other words, auditors present “unqualified” report to ensure all stakeholders that the financial condition, operational activities and position are fairly reflected by the reported financial statements.
An “unqualified” report is also presented when external auditors confirm that the financial records of their audit client are prepared in strict accordance with relevant statutory requirements and regulations. Furthermore, when relevant disclosures concerning all financial matters of an organization are accurately presented in the financial statements, external auditors issue “unqualified” report or opinion. This report also reveals if there are any changes in the following and application of certain accounting principles as well as confirms if these principles are fairly determined and disclosed without any material misstatement.
Qualified Opinion Report
Generally, auditors issue this type of report in cases where the financial statements of an organization contain material misstatement in any disclosure, class of transaction or particular account balance but have no pervasive impact on the reliability and accuracy of all financial statements. Auditors also issue “qualified” opinion report in situations where they fail to acquire audit evidences concerning certain disclosure, class of transaction or particular account balance.
When auditors encounter such a situation where certain account balances do not comply strictly with Generally Accepted Accounting Principles (GAAP) while rest of the accounts in the financial statements contain “fair” presentation of information. These two situations pertain to either deviation from Generally Accepted Accounting Principles (GAAP) or limitation of audit scope when auditing any area of financial statements is impossible for an auditor. “Qualified” opinion report issued by an auditor resembles clean or "unqualified opinion", however, the former report confirms that financial statements are fair and accurate but with certain exceptions .
Adverse Opinion Report
This third type of audit report is issued when there are material misstatements in the financial statements of the audit clients and these misstatements have pervasive impact on an organization’s financial records. Also, when an auditor finds that the financial statements of an entity fail to comply with Generally Accepted Accounting Principles (GAAP) due to which they contain material misstatements with pervasive effects, this type of report is issued by an auditor. This form of report is considered an opposite to “clean or unqualified” opinion as the “adverse” opinion report reflects that the financial statements of an organization are inaccurate unreliable, and incorrect found during the examination of audit client’s operational activities and financial position.
Disclaimer of Opinion Report
This is the fourth type of report an auditor could issue for such reasons when auditor’s independence is compromised or has conflict of interest with audit client’s internal management. Auditors also issue “disclaimer” of opinion report when the audit team fails to obtain succinct audit evidence about certain transactions and disclosures. When an auditor is uncertain about the “Going Concern” or continuity of the audit clients’ business beyond one year due to inevitable uncertainties, this type of audit report is issued.
This type of audit report, in short, is known as a “Disclaimer” and is issued when an audit is unable to or refrains from issuing any kind of opinion on the reliability, fair presentation, conformity and accuracy of the financial records of its audit client. Also, failure to properly or completely audit an entity’s financial records and statements due to different reasons causes an auditor to issue “disclaimer” opinion report for an organization.
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