Businesses that want to attract investors and obtain loans or buyers need an audit to verify financial information. The audit engagement includes an auditor report to express the auditor’s opinion about the information. The auditor will either describe the information as unmodified or modified, based on the information found in the financial statements. The most favorable opinion is unqualified. Here’s the difference:
An unmodified audit report provides a positive impression of the business. In essence, the auditor says that nothing is standing in the way of the financial statements being a fair and accurate portrayal of the material aspects of the business. The financial statements reflect generally accepted accounting principles (GAAP). An unmodified report indicates that accounting policies are correctly documented and disclosed; nothing appears hidden. The report is about the structure of the financial reporting, not necessarily an indication of the financial health of the business. An unmodified opinion will typically state: “the financial statements present fairly in all material respects” and “in conformity with accounting principles generally accepted (GAAP) in the United States.”
Modified reports may cause a bank or investor to request more detail before proceeding with a loan or investment. And, a modified report is typically only issued for certain areas of the business, such as inventory. An auditor issues a qualified report when he or she doesn’t have access to all information required to make an assessment, or when the accounting policies don’t align with GAAP. If information is missing that would give a clear picture of the accounting policies, then an auditor must modify the report. A modified audit doesn’t necessarily mean that the company is in poor financial condition. The report describes the exceptions, tests, or missing pieces of information that prevent a completely clear opinion as of the date of the audit.
How to ensure an unmodified audit
Businesses must follow GAAP to consistently pass the audit process. If you aren’t sure about your accounting system, please talk with a professional sooner rather than later. Additionally, keep information current, such as reconciling bank statements, documenting valuations, and keeping minutes of board meetings. Then, before an audit begins, the auditor will provide a list of information he or she needs to complete the audit. This is your opportunity to ask questions in advance of the audit so that you can prepare to fill in any gaps of information. You must have excellent documentation. When you have an unusual transaction, document the decision-making process and all relevant support documents.
Understanding an audit report helps businesses prepare in advance to provide all of the information necessary. A typical report includes a description of the audit engagement and four sections:
- Whether the financial statements are prepared, in all material respects, in accordance with GAAP, considering the qualitative aspects of the entity’s accounting practices, including possible bias in management’s judgments.
- Whether (a) the financial statements adequately disclose the significant accounting policies; (b) the accounting policies are consistent with GAAP and are appropriate; (c) management’s accounting estimates are reasonable; (d) the information in the financial statements is relevant, reliable, comparable, and understandable; (e) the financial statements provide adequate disclosure; and (f) the terminology used in the financial statements, including the title of each financial statement, is appropriate.
- Whether the financial statements achieve fair presentation by considering the overall presentation, structure, and content of the financial statements and whether the financial statements, including related notes, represent the underlying transactions and events in a manner that achieves fair
- Whether the financial statements adequately refer to or describe GAAP.
If you have questions about audits, please contact your Salmon Sims Thomas advisor.