Auditing 101: What Different Audit Opinions Mean

WHAT DIFFERENT AUDIT OPINIONS MEAN

ONCE IN A WHILE THE PUBLIC

gets flooded with reports of the Auditor-General and read about how billions of rands of public funds have been misspent, rightfully or otherwise. The reports are usually technical and difficult to understand, and the media usually focuses on the negatives and trying to point out who the culprits were and what they didn’t do enough of to get to these often negative audit results with terms such as “fruitless and wasteful expenditure” being thrown around for good measure. But most people don’t usually sit down to get a better understanding of these terms, and what the results really mean. The simplest explanation of what

“THE REPORTS (OF THE AUDITOR-GENERAL) ARE USUALLY TECHNICAL AND DIFFICULT TO UNDERSTAND,AND THE MEDIA USUALLY FOCUSES ON THE NEGATIVES”

auditing is, is that it is the process of checking whether a department or municipality’s financial statements reflect what has taken place during the financial year. This can be done through looking at what has been promised or reported on compared to what has been spent according to the financial statements.

CLEAN AUDIT V CLEAN ADMINISTRATION

So, if an entity reports correctly on what it has spent money on and the auditor deems such information to be correct, then that is a basis of a clean audit. But is this enough? As you can imagine, just reporting correctly – as this does not take into effect whether that information is truthful or not – opens a floodgate to possible fraud

“QUALIFIED AND UNQUALIFIED ARE USED DIFFERENTLY FROM THE WAY WE USUALLY WOULD IN OUR EVERYDAY LANGUAGE.”

and corruption. If we look closely at why we as public entities exist then it would be safe to conclude that this isn’t the right basis by which we can go and judge proper management of public funds. This brings us to the all important point of a clean audit versus clean administration. Clean administration is when your promises have been fulfilled and the money allocated to do those was spent correctly and all funds accounted for. For this to take place it is vital that everyone involved in any level of each organisation knows their part and how it contributes to the

overall clean administration. In a perfect world a clean administration is what we should all aim towards, but in a not so perfect world a clean audit will suffice, as this is a confirmation that all funds reported on in the financial statements have been accounted for, that is, there were no material errors or omissions in the financial statements. Breaking this down further, you will discover that material doesn’t mean the finances weren’t completely without errors or omissions – it’s just that they were of not a big concern. This becomes an issue when the errors or omissions become large enough to influence the outcome of the organisation’s outputs. This is different for each entity as the same amount can mean totally different things depending on the size of their budget. For instance, if a small municipality has an error or omission of a million rand it is totally different compared to let’s say a large department having the same amount recorded for the same thing as the two institutions have different size budget.

QUALIFIED AUDIT V UNQUALIFIED AUDIT

So, other than these ideal outcomes, what else can organisation get in terms of audit outcomes? First up we have qualified audit. This means the financials contain some ‘material misstatements’, or there isn’t enough evidence to decide whether some amounts are accurate enough. Here we need to make the very important distinction, which is usually the need cause of confusion for most people – the difference between a qualified and an unqualified audit. Qualified and unqualified are used differently from the way we usually would in our everyday language. In auditing we always want our report to be unqualified because a qualified audit means the auditor has some reservations about the figures. While an unqualified audit is when the financial statements give a true and fair view in accordance with the financial reporting framework used for the preparation of the statements.

ADVERSE AUDIT

A further step down the list is the adverse audit. This is when an auditor finds the organisation’s financials to have substantial misstatements. In other words, the amount of information that is wrong or left out is significant.

DISCLAIMER

Even worse is the disclaimer. This is when the statements are in such a mess that the auditor cannot conclude an audit or the information on the financials is deemed to be false.