The content of a publicly traded company’s audit must be disclosed in the annual report. Each paragraph of the audit report has a specific purpose. The ultimate purpose of the audit report is to expand the awareness of the features as well as the limitations of the audit for the shareholders.
Paragraph one contains the admission that the management is primarily responsible for the financial statements. This is to clarify the auditors themselves are not responsible.
Paragraph two is a description of the audit. The auditor’s objective is to test the soundness of financial statements by carefully reviewing the accounting records and other supporting documents. The SEC’s Public Company Accounting Oversight Board designates the exact responsibilities of the auditor.
Paragraph three offers the auditor’s opinion. Their opinion can be described as either “clean,” “qualified,” or “adverse.” Another option is they may “disclaim” and offer absolutely no opinion.
Every company desires their financial statements be declared as “clean” with fair presentations of the company’s financial position and earnings. A “qualified” opinion is stated when there are particular areas that the auditors do not deem to be “fair presentation.”
An adverse opinion concludes the financial statements were not found to be “fairly presented.” A list of why they drew this conclusion typically follows.
Paragraph four lists any changes made during the fiscal year in accounting principles. They are described in the specific notes to the financial statements.
Paragraph five is the auditor’s assessment of the management’s system of internal controls over financial reporting.
In addition, a company seeks to be found in conformity with the generally accepted accounting principles (GAAP).