In an audit report, the auditors from an audit firm in Johor Bahru will issue a qualified opinion if they found out that the company has presented its financial statements clearly, but it has not achieved this in some of the parts. Its level is lower than that of an unqualified opinion. The auditors will issue a qualified opinion when they feel that the company has not prepared its financial statements in compliance with the applicable accounting framework, for example, Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).
Qualified opinion in an audit report means that according to the auditor’s opinion, some of the company’s records related to the financial statements do not comply with the standards like GAAP and IFRS. Yet, the company does not give any indication of its misrepresentations of figures and facts. If the auditors issue a qualified opinion, they will highlight the reasons why they do so.
Listed below are the factors that may cause the auditors to express a qualified opinion in an audit report:
– If the financial statements do not adhere to the accounting principles or its stated disclosures are incomplete, the auditors may issue a qualified opinion and explain the reasons for them doing so in the audit report.
– In some occasions, the auditors (Also see Guidelines on Auditing a Corporate Department) and the company’s management may have disagreements when discussing possible treatments of some particular items. Such a situation may include the incorrect categorisation of the accounting entries. For example, some companies may choose to categorise certain expenses as capital expenses. They will not show this in the profit and loss account. Instead, they capitalise the expenses in the balance sheet. Nevertheless, the auditors may have a different opinion on the same transaction, and they may be unsatisfied with the categorisation of such expenses. Thus, they may express a qualified opinion and provide the reasons for them having a different opinion in another paragraph in the audit report.
– There is a restriction in the audit work due to incomplete reports or insufficient information the management has provided to verify some of the business transactions.
– The auditors (Also see Audit Committee – Its Definition, Responsibilities and Requirements) doubt the authenticity of some of the financial data the company’s management has reported.
Examples of situations that lead to a qualified opinion in the audit report:
1. The company fails to provide sufficient information
An audit firm has conducted an audit on Harry International, which has reported its revenue as RM360,000. However, RM60,000 from that amount are cash sales, and the auditors (Also see Advantages of Performing Continuous Audits) were unable to find sufficient evidence for the cash sales as a result of insufficient systems of recording cash sales and weak internal control. Hence, the auditors can’t verify that the revenue Harry International has recorded does not have any material misstatements pertaining to the overstatement of revenues.
Hence, in the auditor’s opinion, the financial statements show a true and fair view of Harry International’s financial position, except for the issue above that leads to a qualified opinion.
2. Under-reporting of provisions
An audit (Also see Auditing the Sales and Collection Cycle) firm has conducted an audit on XYZ corporation according to the related provision of the Act. The auditors found out that the Sundry Debtors/Accounts Receivables XYZ corporation has reported includes an amount of RM20,000 which is due from an organisation that has stopped operating. The debt is unsecured, and XYZ corporation does not have any security for it to liquidate and realise its dues. In fact, XYZ corporation is supposed to make a complete provision of RM20,000 in the profit and loss account, besides reducing its profit by RM20,000 before adjusting for tax purposes.
Hence, in the auditor’s opinion, the financial statements show a true and fair view of XYZ corporation’s financial position, except for the issue above that leads to a qualified opinion.
3. Wrong treatment of the company’s inventory
An audit firm has conducted an audit on Shawn International. The auditors discovered that in the company’s balance sheet, it has reported its inventories at the cost but not stating them at their net realisable value or lower of cost or market (LCM), which is the ideal way. This means the company did not manage it by following the related accounting standard about the valuation of inventories. Based on the records that Shawn International has provided, if it has recorded its inventories at the net realisable value or lower of cost or market, then its gross profit will decrease by RM27,000, and its net profit will reduce by RM25,000, whereas the income tax expense will fall by RM2,600.
Hence, in the auditor’s opinion, the financial statements show a true and fair view of Shawn International’s financial position, except for the wrong treatment of its inventory valuation that leads to the qualified opinion.