Qualified audit report
An auditor's opinion that part or all of a company's financial statements do not give a true and fair view — issued when the auditor disagrees with an accounting policy or finds a serious discrepancy.
In plain language
An auditor does not always simply sign off on a company's accounts. Sometimes the auditor believes part of what is presented is wrong, and says so in the report itself.
That is a qualified report. It is one of three outcomes an audit can produce, and the workbook is clear an analyst should always check which one a company received.
How it works
The workbook sets out all 3 outcomes together: "A qualified report is given when the auditors are convinced that whole or part of the financial statements do not reflect true and fair view. These may arise when auditors disagree with the accounting policy being followed by the company or if they believe that there are some other serious discrepancies." The other two are a clean report (no issues) and a disclaimer (the auditor could not verify enough information to form any opinion at all).
In either a qualified report or a disclaimer, the workbook notes auditors "would elaborate on the reason" — the explanation itself is where the useful detail sits.
A worked example
Illustrative. An auditor issues a qualified report on a real-estate company reporting Rs 500 crore of annual profit, because it disagrees with the company recognising revenue upfront on under-construction projects, rather than on completion. The qualification specifically flags that a meaningful share of that Rs 500 crore may be overstated under the company's chosen policy.
An analyst reading this report discounts the company's headline EPS before using it in any valuation, precisely because the auditor has flagged the number itself as potentially unreliable.
Why NISM asks about it
Chapter 8.9 (Reading audit report to understand the quality of accounting) sets out the three categories. Expect a scenario describing an auditor's finding and asking whether it is a clean report, a qualified report or a disclaimer.
Common exam traps
- A qualified report is not the same as a disclaimer. A qualified report means the auditor identified a specific problem with the accounts. A disclaimer means the auditor could not obtain enough information to form any opinion — a scenario naming missing information points to a disclaimer, not a qualification.
Where this is taught
Free preparation for NISM Series XVRelated terms
- Off-balance sheet itemAn asset, liability or exposure that does not appear on a company's balance sheet, such as certain leases, contingent liabilities or derivative contracts disclosed only in the notes.
- ProvisionAn amount a company sets aside on its balance sheet for a liability that is probable but whose exact amount is not yet known, such as a warranty or a pending legal claim.
- ReservePart of a company's equity set aside from profit for a general or specific future use, such as a general reserve or a capital reserve — distinct from a provision, which is a liability.