At the conclusion of a financial statement audit, the company's audit firm provides an opinion on the company's financial statements. An unqualified opinion communicates to financial statement users that they may have reasonable assurance that the financial statements are free of any material misstatement. This is the most common outcome and has some distinct advantages. Qualified or adverse opinions, which tell users that the financial statements are either partially or fully unreliable, respectively, have some relative disadvantages. Understanding how different audit opinions can affect your small business is important for any small business owner facing his first audit.
Costs of Financing
Companies with unqualified audit opinions, in general, pay less for financing than companies with qualified or adverse opinions. Accounting researchers believe that this occurs because the audit opinion sends a signal to lenders about the company's quality of accounting. If a company has been given an adverse opinion, it may tell lenders that the company's accounting cannot be trusted, making the lending decision difficult. In contrast, an unqualified opinion tells the lender that an independent third-party expert believes that the figures can be trusted.
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Qualified audit opinions may lead to higher audit fees in the future, compared with unqualified audit opinions. Usually a qualified audit opinion indicates that either the company chose not to follow GAAP or the auditor was unable to fully audit a section of the financial statements. In these circumstances, auditors must perform additional procedures to ensure that this situation did not arise due to fraud or misrepresentation. Additional procedures for an auditor mean that the auditor will spend more time auditing, and more time auditing means higher fees for your small business.
Because company creditors may rely upon the financial statements to assess the ongoing creditworthiness of a company, many creditors may stipulate that the company must receive an unqualified opinion to be in accordance with loan terms or covenants. In these cases, the lack of an unqualified audit opinion could cause the company to be in default on a loan, even if all payments have been made in a timely manner. This can be especially difficult for a small business, as many loan documents allow the bank to request the loan amount in full in the event of a default.
If a company has been granted an unqualified audit opinion, suppliers are more likely to grant favorable credit terms. Like more traditional lenders, suppliers use the company's financial statements when evaluating creditworthiness. Therefore, if the company's financial statements cannot be evaluated reliably, the supplier must assume the worst. Sometimes this means that materials will only be delivered COD or credit discounts will not be provided. Small businesses that are in this situation may be able to gain more liberal credit terms after a good payment history has been built up with the supplier.