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Auditor's Opinion Letter
Before analyzing customers' financial statements, a credit professional should review the auditor's opinion letter to determine the scope of the audit. Relative to financial statements and the use of outside auditors, there are basically four different types of opinion letters that can be submitted. They are:
1. The unqualified opinion,
2. A qualified opinion,
3. An adverse opinion,
4. A disclaimer of opinion.
Unqualified Opinion
An unqualified opinion letter involves a certification made by the independent CPA firm that the company's financial statements were prepared in conformity with Generally Accepted Accounting Principles [GAAP], and fairly represented the firm's financial condition on the statement date.
A Qualified Opinion
A qualified auditor's opinion letter is one in which the CPA has included one or more specific qualifications to its assurance that the customer's financial statements follow GAAP. This means that one or more irregularities were found, and that the customer could not or would not correct these irregularities.
An Adverse Opinion
Arguably the most serious of all the opinion letters that can accompany a customer's financial statements, when a CPA firm discovers information during the course of its audit that demonstrates material noncompliance with GAAP accounting rules, the CPA may choose to submit an adverse opinion letter to accompany the financial statements of the company under review. An adverse opinion letter states that the customer's financial position is not fairly presented by the statements submitted. The auditor must provide specific reason(s) for an adverse opinion. Clearly, credit professionals should be concerned about an adverse audit opinion.
Disclaimer of Opinion
Due to scope limitations, a CPA may be unwilling to express any opinion about the accuracy of a customer's financial statements. A disclaimer of opinion letter means the CPA does not assume responsibility for the accuracy of the company's financial statements.
Note: A truly independent audit would involve and require the CPA firm to be completely objective. This objectivity can be called into question when one remembers that the CPA firms that audit companies are both the auditor and the client of the company being audited.
© 2011. Michael C. Dennis. All Rights Reserved. Michael is an author, lecturer, and consultant. He can be reached via email at mcdennis13@yahoo.com