15.2. What's in an Auditor's Report

The large majority of financial statement audit reports give the business a clean bill of health, or what's called a clean opinion. (The technical term for this opinion is an unqualified opinion, which means that the auditor does not qualify or restrict his opinion regarding any significant matter.) At the other end of the spectrum, the auditor may state that the financial statements are misleading and should not be relied upon. This negative, disapproving audit report is called an adverse opinion. That's the big stick that auditors carry: They have the power to give a company's financial statements an adverse opinion, and no business wants that.

The threat of an adverse opinion almost always motivates a business to give way to the auditor and change its accounting or disclosure in order to avoid getting the kiss of death of an adverse opinion. An adverse audit opinion says that the financial statements of the business are misleading. The Securities and Exchange Commission (SEC) does not tolerate adverse opinions by auditors of public businesses; it would suspend trading in a company's securities if the company received an adverse opinion from its CPA auditor.

15.2.1. The clean (unqualified) opinion

If the auditor finds no serious problems, the CPA firm gives the business's financial statements an unqualified or clean opinion. However, I should warn you that the standard audit report has enough defensive, legalistic language to make even a ...

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