What are the 4 Types of Audit Reports and Opinions?

Audit is a crucial part of increasing your company’s credibility — aside from letting you stay compliant with relevant accounting standards, it also boosts shareholders’ and investors’ confidence in your financial standing.

During an audit, an independent auditor examines your financial statements and procedures. After this process, the auditor will release a document that contains their opinion about your company’s reported financial information. We call this document an audit report. 

But here‘s the catch: Not all audit reports are of equal value.  

If this is the case, what type of audit report should you aim to have?  

To answer this, let’s break down the four (4) main types of audit reports and auditor’s opinions — and what they tell you about your financial statements. 

 

In search of a quick guide? Check out this infographic: The 4 Types of Audit Reports: A Quick Guide 

 

What is an audit report? 

An audit report is a document an auditor prepares after reviewing your company’s financial statements. Aside from its contents, an auditor also examines if you applied the relevant standards in preparing your reports. 

The audit report has four (4) main types — the clean report, qualified report, disclaimer report, and adverse report.  

Each of these reports contains a distinct auditor’s opinion or a statement from an auditor that concludes if your financial statements: 

• adhere to the applicable financial reporting framework (e.g., GAAP and IFRS),  
• provide a true and fair view of your company’s operations, financial position, and cash flows, and 
• are free of material or pervasive misstatements*. 

By law, public companies should undergo an annual audit to protect shareholders’ interests and the integrity of public markets. Private companies can also have their financial statements audited to satisfy investors and lenders — though it’s more of a voluntary act. 

 

*Notes:  

Auditors use the term “material misstatements” to refer to omissions and other significant errors in financial statements that can reasonably influence the economic decisions of investors and/or potential investors. Meanwhile, a misstatement is “pervasive” if it affects many elements of the financial statements — thus, making the entire financial statement unreliable.

 

Related: Why Consider Internal Audit Outsourcing for Your Company? 

 

The 4 types of audit reports and opinions

1. Clean report

Auditor’s opinion: Unqualified opinion 

A clean report means your financial statements are compliant with GAAP or IFRS. It also shows that you have presented the financial position of your company in a true and fair manner. Thus, the reason why the auditor concluded that your reported financial information is free of material misstatements. 

Getting an unqualified opinion through a clean report raises a green flag for investors — a signal notifying them that it’s safe to invest in your company. 

 

2. Qualified report

Auditor’s opinion: Qualified opinion 

A qualified report indicates that your financial statements contain some errors or misstatements albeit being presented fairly. In other words, misstatements are material but not pervasive. 

In practice, it can happen when a specific section of your financial statements either: 

• failed to conform with GAAP/IFRS or  
• could not be audited. 

Auditors prepare a qualified report in the same way they prepare a clean report. The only difference is an explanatory paragraph that specifies why they cannot give an unqualified opinion.  

Unless you address the identified issues, investors may stay away from your company due to the auditor’s lack of confidence in your financial reporting practices. 

  

3. Disclaimer report

Auditor’s opinion: Disclaimer of opinion 

Auditors issue a disclaimer report if they cannot form a definite opinion about your company’s reported financial information. 

An auditor may refuse to state an opinion due to a: 

• Limitation in scope: The auditee limited the auditor’s access to relevant information. As a result, the latter cannot obtain sufficient and appropriate audit evidence to form an opinion. 
• Possible material misstatements and pervasiveness: The information that cannot be audited could have material and pervasive effects. 

Auditors may also render a disclaimer of opinion if the auditee cannot satisfy their questions or if there are conflicts of interest between both parties. 

Receiving a disclaimer report is unacceptable for investors and regulators. Because of this, you’ll have to go through another audit to address the issues that resulted in an auditor’s disclaimer of opinion. 

 

4. Adverse report

Auditor’s opinion: Adverse opinion 

Of all types of audit reports, the adverse report is the least desirable and should be avoided at all costs. 

When auditors issue an adverse opinion, it means that there has been a gross misstatement and pervasiveness in the preparation of your company’s financial records. 

An adverse report raises a huge red flag for investors and regulators because such misstatements and pervasiveness can indicate fraud and dishonest practices within the company. If this reality sets in, your company could potentially lose investors’ confidence and face legal consequences. 

 

Read Next: Knowing the Basics of Your Company’s Audit and Audit Report 

How do auditors form an audit opinion? Revisit the basics by reading this guide from the Association of Chartered Certified Accountants: Forming an Audit Opinion. 

 

Obtain the most ideal type of audit report

Of the four different types of audit reports, it’s clear that you should aim to obtain a clean report — an audit report that contains an auditor’s unqualified opinion on your financial statements. Through this, you can prove that your company has ethical financial practices and a good financial position. 

 

And if you need help in ensuring your accounting department’s compliance with the applicable standards and regulations, our accountants and auditors at D&V Philippines are at your service.  

For more information about our services, feel free to talk to our audit experts or download our whitepaper, Seasonal Audit Support for US Audit Firms. 

This article was first published on 12 September 2017 and updated on 21 May 2024 for relevance and comprehensiveness. Edited by: Mary Milorrie Campos