What is an Audit Opinion Letter — and Why is it Important?
You may want to have a financial audit performed at your dealership for a variety of reasons. With many owners today nearing retirement age, one of the most common reasons is to provide assurance to potential buyers that the dealership’s finances are in good shape.
Financial audits are performed by CPAs and public accounting firms that conduct an exhaustive confirmation and inquiry of a business’ financial statements. Based on this documentation, the CPA will prepare an extensive audit report that details the findings and whether the financial statements are prepared in accordance with Generally Accepted Accounting Principles (GAAP).
Before you get to the “meat and potatoes” of the audit report, however, you’ll want to pay close attention to the audit opinion letter. This usually constitutes the first page of the report. In the letter, auditors state their opinion on the quality of the financial statements and whether you’re complying with accounting principles.
An audit opinion letter is usually three paragraphs long. The first paragraph lists the name of the business in question, the responsibilities of the auditor and the accounting period being analyzed. The second paragraph details the scope of work performed by the auditor. And the third paragraph gives the official audit opinion, based on the auditor’s review.
The auditor may issue one of four different opinions about your dealership’s financial statements:
An unqualified opinion. Also known as a clean opinion, this is the most desirable result of a financial audit. This opinion essentially gives your dealership a clean bill of financial health.
By issuing an unqualified opinion, the auditor is stating that he or she found no material misstatements or violations in your financial statements. Also, an unqualified opinion usually states that the financial statements have been prepared in accordance with GAAP.
A qualified opinion. This opinion is issued if the auditor concludes that your financial statements contain minor deviations from GAAP. As a result, the auditor can’t give your dealership a totally clean bill of health.
An auditor may also issue a qualified opinion if there’s a limitation in the audit’s scope — or, in other words, if he or she can’t audit one or more areas related to your financial statements. The qualification will relate only to the financial areas the auditor couldn’t audit.
An adverse opinion. This is the most unfavorable opinion your dealership can receive. An adverse opinion means that the auditor discovered significant material misstatements that affect your financial statements overall.
The auditor is essentially declaring that your financial statements aren’t prepared in accordance with GAAP, and your dealership’s financial information should be considered inaccurate and unreliable. An adverse opinion could be a red flag that there’s fraud at your dealership. The opinion letter may contain an additional paragraph that details the problems discovered.
A disclaimer. An auditor will issue a disclaimer if he or she is unable to complete the audit report or unwilling to form an opinion about your dealership’s financial statements. This could happen due to missing financial records, a lack of management cooperation, significant audit scope limitations or material doubts about your ability to continue operating as a going concern.
A disclaimer also may be issued if the auditors determine that they lack enough independence to provide an unbiased third-party opinion of your finances. For example, this could take place if the auditor is providing management advisory services along with the audit. The audit opinion letter may contain an additional paragraph explaining why the auditor is unable or unwilling to opine on your dealership’s finances.
Note: The audit opinion letter shouldn’t be considered an endorsement or evaluation of your dealership’s financial results. It’s simply a statement of the auditor’s professional opinion regarding the quality of your financial statements and whether they were prepared in accordance with GAAP.
Understanding your audit
It’s important to understand these audit opinions and what they reveal about your dealership’s financial statements. Be sure to contact your accounting professional if you have further questions about financial statement audits and the audit opinion letter that accompanies them.