The Difference Between a Qualified & Unqualified Audit Report

An external auditor issues an audit report to provide an opinion about the stability of a company's finances, operational standing and compliance with laws and regulations. The main difference between an unqualified and qualified report lies in whether the report shows possible issues with the company's financial controls. A non-profit organization, a government entity or a company listed on a securities exchange would use an unqualified audit report to show business partners that internal controls are adequate and functional. In contrast, an organization uses a qualified report to show any deviation from standard accounting principles that the company should address.

An auditor issues an unqualified audit report to show that the company's internal controls do not demonstrate any significant issues of concern. An auditor typically applies generally accepted auditing standards (GAAP) to ensure that a firm's internal controls are adequate, functional and established in conformity to laws and regulations. A control is a set of instructions that an organization's top leadership establishes to prevent operational losses resulting from error, technological malfunction or fraud.

A company's ultimate goal is the issuance of an unqualified audit report since having a clean bill of operational and financial health indicates to investors and regulators that senior managers are effective. Other benefits of an unqualified opinion may include improved relationships with business partners such as lenders, customers and suppliers. For example, a firm that receives an unqualified audit report at the end of the year is more likely to be approved for a loan.

When an audit discovers concerns that the company does not adhere to generally accepted accounting principles, he or she issues a qualified audit report. This is usually in response to one of two scenarios: a single deviation from GAAP or scope limitation. As an illustration, an auditor who reviews a bank's financial statements wants to test commission-receivable transactions. The auditor notes that the company records commission fees on trading transactions before the due date, which does not conform to GAAP (single deviation). The auditor also cannot review commission-payable accounts because the firm's computer systems are dysfunctional (scope limitation). The auditor may issue a qualified audit opinion and explain reasons for the qualification.

While a qualified audit report is not as bad as an adverse opinion, it could still possibly harm the company's financial standing. To illustrate, a firm listed on a securities exchange may see a sharp decrease in its stock value if investors do not understand the extent of internal problems noted in a qualified report. Additionally, a lender or a supplier may require more financial guarantees from a company before engaging in future transactions.

While an unqualified report shows that there are no issues of concern, a qualified audit report indicates to senior management there are internal control problems in financial reporting mechanisms. Senior leaders may establish corrective measures and ensure that employees follow new measures when performing their duties. Once issues are resolved to the auditor's satisfaction, he may issue an unqualified opinion at the end of the following audit.