how an auditor s report works
an auditor s report is a written letter attached to a company s financial statements that expresses its opinion on a company s compliance with standard accounting practices the auditor s report is required to be filed with a public company s financial statements when reporting earnings to the securities and exchange commission sec 1however an auditor s report is not an evaluation of whether a company is a good investment also the audit report is not an analysis of the company s earnings performance for the period instead the report is merely a measure of the reliability of the financial statements the components of an auditor s reportthe auditor s letter follows a standard format as established by generally accepted auditing standards gaas a report usually consists of three paragraphs 1an additional paragraph may inform the investor of the results of a separate audit on another function of the entity the investor will key in on the third paragraph where the opinion is stated the type of report issued will be dependent on the findings by the auditor below are the most common types of reports issued for companies a clean report means that the company s financial records are free from material misstatement and conform to the guidelines set by gaap a majority of audits end in unqualified or clean opinions 1a qualified opinion may be issued in one of two situations first if the financial statements contain material misstatements that are not pervasive or second if the auditor is unable to obtain sufficient appropriate audit evidence on which to base an opinion but the possible effects of any material misstatements are not pervasive for example a mistake might have been made in calculating operating expenses or profit auditors typically state the specific reasons and areas where the issues are present so that the company can fix them 1an adverse opinion means that the auditor has obtained sufficient audit evidence and concludes that misstatements in the financial statements are both material and pervasive an adverse opinion is the worst possible outcome for a company and can have a lasting impact and legal ramifications if not corrected 2regulators and investors will reject a company s financial statements following an adverse opinion from an auditor also if illegal activity exists corporate officers might face criminal charges 3a disclaimer of opinion means that for some reason the auditor is unable to obtain sufficient audit evidence on which to base the opinion and the possible effects on the financial statements of undetected misstatements if any could be both material and pervasive examples can include when an auditor can t be impartial or wasn t allowed access to certain financial information 1example of an auditor s reportexcerpts from the audit report by deloitte touche llp for starbucks corporation dated nov 15 2019 follow we have audited the accompanying consolidated balance sheets of starbucks corporation and subsidiaries the company as of september 29 2019 and september 30 2018 the related consolidated statements of earnings comprehensive income equity and cash flows for each of the three years in the period ended september 29 2019 and the related notes collectively referred to as the financial statements in our opinion the financial statements present fairly in all material respects the financial position of the company as of september 29 2019 and september 30 2018 and the results of its operations and its cash flows for each of the three years in the period ended september 29 2019 in conformity with accounting principles generally accepted in the united states of america 4 we conducted our audits in accordance with the standards of the public company accounting oversight board pcaob those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement whether due to error or fraud our audits included performing procedures to assess the risks of material misstatement of the financial statements whether due to error or fraud and performing procedures that respond to those risks such procedures included examining on a test basis evidence regarding the amounts and disclosures in the financial statements our audits also included evaluating the accounting principles used and significant estimates made by management as well as evaluating the overall presentation of the financial statements we believe that our audits provide a reasonable basis for our opinion 4