3.5: The Audit

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Now that we know what financial statements are, and what set of problems may ensue in readings statements, it is important to know well what the accountant’s role relative to the production of the statements is. Certified Public Accountants (C.P.A.s) examine, i.e., “audit,” the books, ledgers, and records of corporations in order to ascertain the data entries’ veracity and accuracy, and prepare summary financial statements such as those we have seen in our Balance Sheet and Income Statement discussions.The statements are, once again, summaries of myriad, and often complex, transactions that occurred within the corporation over the course of the stated period – for the Income Statement, or “as of” a date noted – in the case of the Balance Sheet.

The auditors will present one of four possible “opinions” about the statements. The analyst should examine the opinion for information concerning the accuracy and comprehensiveness of the statements’ data prior to reading the statements themselves.

Unqualified Opinion: This is the ideal opinion and is considered a “complete audit.” The results are satisfactory, and the statements are “fairly presented” in the language of the auditor/accountant.
Unqualified Opinion with Explanatory Paragraph: This may be a complete audit, but the auditor believes that additional information is required.
Qualified Opinion: In general, the statements are fairly presented with an important exception that does not affect the statements as a whole. This generally occurs when there is an unjustified deviation from “Generally Accepted Accounting Principles,” or GAAP. This opinion falls short of “Adverse.”
Adverse Opinion: The auditor does not feel that the statements taken as a whole fairly present the corporation’s financial position in conformity with GAAP accounting.