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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Qualified Opinion

What it is:

A qualified opinion is a cautionary written notice from an auditor stating that a company has not complied with generally accepted accounting principles (GAAP)

How it works (Example):

There are two main reasons an auditor may write a qualified opinion on a company's audit report:

1.) Deviations from GAAP: The audited company did not accurately follow the GAAP accounting principles on one or more items in their financial report.

2.) Limitation of scope: Not all financial statement information was available to the auditor. However, the financial information that was audited conformed with GAAP.

For example, let's assume that Company XYZ is a publicly traded company. At year-end, Company XYZ hires Auditor ABC to conduct an audit of its financial statements, practices, and controls for the previous fiscal year

Auditor ABC discovers that Company XYZ has not accounted for inventory correctly, has kept incomplete records regarding its cash accounts, and did not provide adequate records for review regarding depreciation. As a result, the auditor would likely give a qualified opinion for Company XYZ due to both limitation of scope (incomplete records) and deviation from GAAP (errors in accounting for inventory). 

Why it Matters:

The qualified opinion appears in the form of a letter that accompanies the firm's financial statements.

A qualified opinion is a strong signal to investors that a company's financial accounting methods need to be improved upon and aren't necessarily wholly reliable. A qualified opinion is not the same as an adverse opinion, which is a more severe cautionary report containing extensive exceptions and warnings.

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