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)鈥攂ut one that is not pervasive. Qualified opinions may also be issued if a company has inadequate disclosures in the footnotes to the financial statements.
- A qualified opinion is one of four possible auditor's opinions on a company's financial statement.
- It indicates that there was either a scope limitation, an issue discovered in the audit of the financials that was 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.
Understanding a Qualified Opinion
A qualified opinion may be given when a company鈥檚 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 judgement. 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 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.
A qualified opinion is listed in the third and final section of an auditor鈥檚 report. The first section of the report outlines management鈥檚 responsibilities in regards to preparing the financial statements and maintaining internal controls. The second section outlines the auditor鈥檚 responsibilities. In the third section, an opinion is given by the independent auditor regarding the company鈥檚 internal controls and accounting records. The opinion may be unqualified, qualified, adverse, or a disclaimer of opinion.
Example of a Qualified 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.
Qualified Opinion vs. Other Opinions
A qualified opinion is a reflection of the auditor鈥檚 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 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.