qualified opinion

DEFINITION: The phrase “qualified opinion” refers to an independent auditor’s report accompanying a company’s audited financial statements.

A qualified opinion expresses the independent auditor’s belief that the financial information supplied by the company was in some way inadequate or that a significant disagreement arose about the application of generally accepted accounting principles (GAAP).

However, it is important to note that the problems outlined in a qualified opinion are not pervasive or overly serious.

Qualified opinions may also be rendered when the footnotes accompanying a company’s financial statements do not furnish sufficient disclosures.

ETYMOLOGY: Legally mandated independent auditing can be dated back to the 1840s in New England; however, America’s modern system of auditing, including qualified opinions, dates only from the 1930s.

The English adjective “qualified” is attested from the sixteenth century. The word derives from the Middle French verb qualifier, meaning “to qualify” or “to describe,” and Medieval Latin, qualificare, meaning “to judge,” “to define,” “to describe,” or “to qualify.” The Medieval Latin verb, in turn, derives from the classical Latin adjective quālis, quāle, meaning “of what kind,” “such,” “such as,” or “like.”

The English noun “opinion” is attested from the fourteenth century. It derives, via Middle English and Middle French, from Latin noun opīnio, opīnionis, meaning “opinion,” “conjecture,” or “supposition,” which is related to the deponent verb opīnor, opīnari, meaning “to believe,” “to suppose,” or “to conjecture.”

USAGE: One of principal reasons why qualified opinions are issued is because, for certain transactions, a company’s financial records deviate from GAAP.

The issuance of a qualified opinion in such a case implies that the departure from GAAP is not widespread. Independent auditors possess the professional discretion to interpret how much latitude may be given to applying the concept of “pervasive” in a given set of circumstances.

However, for an error to be considered non-pervasive, representation of the overall financial state of the company created by the error must not be factually inaccurate or impact the decision-making of users who might potentially rely upon the financial statements.

A qualified opinion can also arise when the information provided by a financial statement is inadequate, in the sense that it prevents an auditor from acquiring the evidence necessary to substantiate the statement’s claims. In the absence of thorough transaction validation, an unqualified opinion cannot be provided.

Additional reasons for a qualified opinion’s being issued include insufficient information in the financial statement’s footnotes, uncertainty surrounding quantitative estimates, or the absence of a cash flow statement.

Qualified opinions are presented in the third and last section of an independent auditor’s report.

 The first part of the auditor’s report spells out the responsibilities of the company’s management with respect to the formulation of financial statements and the maintenance of internal controls.

The second section describes the obligations of the auditor.

In the third section, the auditor furnishes an assessment of the company’s internal controls and accounting records. This assessment can take the form of an unqualified opinion, a qualified opinion, an adverse opinion, or a disclaimer of opinion.

A qualified opinion affirms that the financial statements of a corporate client are fairly represented, except for a designated problem area. In their qualified opinions, auditors commonly employ qualifying language such as “with the exception of the following” in their report. Such language indicates that the auditor lacks sufficient information to confirm specific components of given financial transactions.

It is very important to stress that a qualified opinion does neither represents a dire assessment of a business’s financial performance nor suggests that it is concealing or distorting information in its financial statements. Rather, a qualified opinion means that an auditor is unable to provide an entirely flawless report.

Issuing a qualified opinion means that the auditor acknowledges the overall accuracy and truthfulness of the company’s financial statements. Nevertheless, such an opinion pinpoints specific aspects of those statements that the auditor considers problematic.