You’ve just gotten back your first audit report from your Hong Kong auditor, but being unfamiliar with accounting and auditing terms means you have no idea how to read the report! No need to fret though, in this article we’ll cover the most important sections of an audit report, including what key phrases to look for and what they mean.
The Goal of an Audit Report
An auditor’s goal in performing an audit is to ensure that the content on your financial statements are true to reality, complies with Hong Kong’s financial reporting standards, and that the math is done correctly. What this also means is that the outcome of the audit report is not to say whether the state of your finances are healthy or not. This is also why in Hong Kong, auditors must be a third-party, as they will have no stake in your business, and are most likely going to provide an unbiased opinion.
With this goal in mind, there are three main sections of an audit report you should pay special attention to.
The Auditor’s Opinion
The auditor’s opinion is a summary of the auditor’s thoughts after reviewing your company’s financial statements, marked by key phrases that say whether your financial statements are in order, whether there’s missing information, or whether the auditor thinks your documents have not presented the information fairly.
Unmodified Opinion
This is the best possible outcome you want to achieve with your audit report in Hong Kong. An unmodified opinion would usually be presented as the phrase, “ the financial statements give a true and fair view of the state of the Company’s affairs” or “the financial statements of the Company are prepared, in all material aspects, in accordance with the Hong Kong Small and Medium-sized Entity Financial Reporting Standard (SME-FRS),” or something to that effect. This means that the auditor believes that there is nothing materially wrong with the company’s financial statements and can be taken at face value. Here’s a sample of an Unmodified Opinion from the HKICPA’s website.
Getting an unmodified opinion should be your critical goal for every audit, as there are a number of difficulties that can follow if you should receive a Modified Opinion, namely:
- Banks will be less likely to approve any loans to you if your books, and your credit by extension, are shown to be untrustworthy.
- Your investors may be more distrustful of your leadership if they cannot trust your financial statements.
- The Inland Revenue Department (IRD) will question you further on your financial position when it comes time to do your taxes.
Modified Opinion
A modified opinion means that the auditor believes that certain aspects of the company’s financial statements have not been presented fairly or is missing information. The auditor will usually go into more detail on this, broken into several subcategories of opinions:
Qualified Opinion
A qualified opinion usually contains phrases like “except for” or “with the exception of”, followed by the reasons for exception. A qualified opinion usually denotes restrictions on the scope of the audit, lack of evidence to support the company’s financial claims, or that the company’s financial statements differ from typical accounting practices.
The HKICPA has samples of Qualified Opinions on their website.
Adverse Opinion
An adverse opinion usually contains a phrase to the effect of “do not present fairly”, indicating that the company’s financial statements are not reflective of the results of the auditor’s investigation of the company’s financial position. In other words, the math doesn’t add up.
Disclaimer of Opinion
A disclaimer of opinion usually contains the phrase “do not express an opinion”, and is used when there’s a lack of sufficient accounting records to perform an accounting audit and get a fair assessment.
Notes to Financial Statements
You will also want to go through the audited financial statements from your auditor. Pay particular attention to the footnotes included by the auditor, as this is usually where they will note the breakdowns of certain items on your financial statements.
For example, a software company would have a breakdown of all its hardware equipment and paid software listed in the Notes to Financial Statements.
Basis for Qualified Opinion
If the audit report mentions a qualified opinion, it will be followed up with the reason for putting out the qualified opinion. If you receive a qualified opinion, the basis for the qualified opinion is what you should be looking to resolve for next year’s audit.
Conclusion
The goal of the audit report is to know whether your financial statements are reflective of reality, and your goal as a company is to get an unmodified opinion on your audit report. As CPA accountants, we would like to see all our clients get unmodified opinions if possible, but only through consistent record keeping can you maintain a clean record. Want to learn how? Let us help!
