When providing audit services, clients always ask us what an auditor’s report is? How do different auditor’s opinions affect their companies? Let us explain everything to you.

Financial Statements? Auditor’s Reports?

Financial statements are statements and notes that convey a company’s financial statement in a certain period (in Hong Kong, SMEs follow an annual basis in general). Different stakeholders can learn more about a company’s business activities and performance by reading through financial statements.

Auditor’s reports are written documents issued by certified public accountants (Hong Kong Institute of Certified Public Accountants is the only official organization in Hong Kong for registering accountants and issuing practicing certificates). The reports include formal auditor’s opinions based on professional auditing standards and all audit work done.

Auditor’s reports are included in financial reports. Related parties can evaluate the validity of financial statements from an independent accountant’s perspective.

Content of Auditor’s Reports

1. Introduction – Background information of the company (such as the company’s name, financial period).
2. Audit Opinion – Opinion on the objectivity of financial statements prepared by the company.
3. Material Uncertainty – (depends on the company’s ability to continue as a going concern)
4. Key Audit Matters (only applicable to listed companies) — In the auditor’s professional judgment, the most significant matters in the audit of the financial statements
5. Other Information (only applicable to listed companies) — All non-financial information considered materially inconsistent with the financial statements or auditor’s knowledge, will be reported in the other information section.
6. Responsibilities of Director or Company Managers for the Financial Statements
7. Auditor’s Responsibilities for the Audit of the Financial Statements

Auditor’s opinion

Accountants evaluate a company’s information and records and conclude whether

the financial statements follow the Generally Accepted Accounting Principles (GAAP).

After that, accountants will deliver a corresponding auditor’s opinion. There are four

types of auditor’s opinions:

1. Unqualified opinion
2. Qualified opinion
3. Adverse opinion
4. Disclaimer of opinion

A. Unqualified opinion

An unqualified opinion means that the accountant has obtained sufficient and appropriate evidence to conclude that the information in the financial statements is free from material misstatement. In other words, an unqualified opinion means that there is no problem in the company’s financial statements.

B. Modified opinion

Qualified opinion, adverse opinion, and disclaimer of opinion are regarded as modified opinions. Modified opinion will be issued when financial statements violate accounting standards or Companies Ordinance, leading to material misstatements of the amounts, classifications, or disclosure. Another reason is that the accountant is unable to obtain sufficient and appropriate evidence to conclude that the information in the financial statements is free from material misstatement. The accountant will determine whether to deliver modified opinion based on the pervasiveness of the effects or possible effects of the matter on the financial statements.

i. Qualified opinion

Qualified opinion will be issued when the amounts, classifications, or disclosure of the financial statements are associated with fundamental errors, or the accountant has obtained sufficient and appropriate evidence to conclude that there are material misstatements. Those misstatements are material, but their effects

1. are limited on a certain accounting item.
2. are not pervasive.
3. are not significant for users to understand the financial statements.

This means except for the stated misstatements in the auditor’s report, other parts of the financial statements are true and fair. Therefore, qualified opinion has less influence than the other two types.

ii. Adverse opinion

Adverse opinion will be issued when the accounting has obtained sufficient and appropriate evidence to conclude that there are material misstatements on the amounts, classifications, or disclosure of the financial statements. The misstatements will affect

1. multiple accounting items
2. the financial statements in a pervasive way
3. the users significantly when understanding the financial statements.

Therefore, adverse opinion indicates financial statements have major problems in different aspects. The accountant decides to deny the financial statements.

iii. Disclaimer of opinion

Disclaimer of opinion will be issued when the accountant is unable to obtain sufficient, and appropriate audit evidence on which to base the opinion and the accountant cannot conclude that the financial statements are true and fair, while the uncertain parts affect

1. multiple accounting items
2. the financial statements in a pervasive way
3. the users significantly when understanding the financial statements.

Therefore, disclaimer of opinion indicates that the financial statements involve multiple uncertainties. As a result, it is not possible for the accountant to form an opinion on the financial statements.

Effects of Auditor’s Opinion

Auditor’s opinion represents the accountant’s comment on the company’s financial statements. Its purpose is to give stakeholders a deeper and complete understanding of the financial statements. The most common stakeholders of SMEs are banks and the Inland Revenue Department.

A. Banks

If the company has obtained a bank loan, banks may require the company to provide financial statements and auditor’s reports. If modified opinion is issued, not only additional proof may be required, banks may also impose stricter loan requirements.

B. The Inland Revenue Department

When completing profits tax returns, companies are required to file information in the auditor’s report. (e.g., name of the auditor, any adverse opinion or disclaimer of opinion, date of the auditor’s report). Suppose the auditor has issued an adverse opinion or a disclaimer opinion to the financial statements. In this case, there will be a greater chance for the company to be selected for further investigation by the department.

Although modified opinion will adversely affect the company, the company will not be affected by operation difficulties or forced to suspend operation.

That’s all the information and knowledge of auditor’s reports and auditor’s opinion we want to share with you. We hope you can gain a deeper and more sophisticated understanding of the auditor’s report. If you have any ideas or questions, do not hesitate to leave your comment in the comment section.

Pacers is a diversified company providing professional consultancy services. We always think a step further for our clients. If you have encountered any difficulties when filing tax, please feel free to contact us directly on our website or email info@pacersconsulting.com.

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