Definition of Audit Qualification Report

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Definition of Audit Qualification Report
A qualified audit report means a company has problems in internal processes. (accounts image by Alexey Klementiev from Fotolia.com)

An external auditor issues a qualified audit report if a company's financial statements do not comply with accounting principles, industry guidelines or regulatory rules. An audit specialist also could issue this type of report to indicate that an audit did not cover a significant area, department or section of a company.

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Facts

An external auditor must gather facts during an audit to justify an audit opinion. This specialist applies generally accepted auditing standards (GAAS) to collect audit evidence and information. An auditor also tests controls and processes around accounting records to ensure that financial statements are "fair," complete and in compliance with generally accepted accounting principles (GAAP) and industry standards ("fair" means "correct" in audit parlance).

Types

An external auditor issues a qualified opinion in three situations: accounting deviation, scope limitation and doubts about "going concern." Accounting deviation means that a company's financial statements do not comply with GAAP, industry practices or regulatory standards. Limitation of scope means that an auditor could not review all significant processes, mechanisms or policies in an area, a segment or a department. "Going concern" doubts indicate that an auditing specialist is unsure whether a company will remain in business or file for bankruptcy in the near future--that is, in six to 18 months.

Effects

A qualified audit report may affect a company's operations negatively. Trade partners--such as lenders, suppliers and customers--could interpret a qualified opinion as a sign of monetary trouble. Regulators also may investigate the activities of an organisation that receives a qualified report. This report also could have an adverse effect on a publicly traded company by lowering share values. For example, Idaho-based Everything-Must-Go Inc. receives a qualified report and sees its stock price drop from £13 to £6 and its bond yield--or interest--rise from 5 per cent to 7.5 per cent.

Warning

A qualified report signals to a company's top leadership that there are significant control problems or financial inaccuracies in accounting records. It also requires top management to implement measures and controls to remedy significant issues properly and quickly. An external auditor may issue an adverse--or unfavourable--report to a company that fails to correct problems after a period of time or does not provide temporary solutions.

Expert Insight

Professional standards require an external auditor to communicate with various groups prior to issuing a qualified opinion. First, an audit specialist must discuss with top company management about control problems or accounting inaccuracies. Second, an external auditor must review a company's situation with internal auditors. Third, this specialist must communicate significant audit issues with a superior or a partner within the public accounting firm's audit group. Fourth, an auditor also could seek advice from another public accounting entity if the client under review is a major company.

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