What is an audit report? The 4 types of audit reports & opinions
According to the 2025 Pulse of Internal Audit report, more than 80% of respondents have a functional reporting relationship with the board. In audit reporting, an auditor compiles and delivers their opinion about the audit results. As simple as that may sound, audit reports can actually be quite complicated. Some information required for audit reporting isn’t readily available, and some information is subjective. Not to mention there are four types of audit reports and opinions an auditor can deliver.
When done well, an audit report can give the board, its audit committee and investors deep insight into the organization’s financial performance. They also allow auditors to comment on a company’s financial reporting and offer opportunities for improvement. To help companies understand what to expect from their next audit, this article will explain:
- What an audit report is
- What an audit opinion is
- The four types of audit reports and opinions
- Obtaining a favorable audit opinion
What is an audit report?
An audit report is a formal, independent assessment in which an auditor shares their opinion on an organization’s financial performance, internal controls or regulatory compliance. It provides stakeholders with an objective evaluation of the organization’s financial accuracy, transparency and adherence to accounting standards. Auditors must follow the format defined by the generally accepted auditing standards (GAAS), with some exceptions depending on the nature of the audit.
That said, audit reports will generally include a description of the auditor’s role, management’s role, the scope of the audit and the audit opinion.
What is the purpose of an audit report?
The purpose of an audit report is to make a statement about a company’s financial status related to its financial reporting, internal controls or regulatory compliance. Annual audits demonstrate transparency in corporate financial reporting, a positive step in establishing good relationships between companies, their investors, and the public.
Investors analyze audit reports and base much of their investment decisions on the information in them. Regulators also review audit reports to decide whether to assess penalties for noncompliance.
However, audit reports serve myriad purposes:
- Ensure financial accuracy and integrity: The audit report provides a picture of a company’s financial performance in a given fiscal year and how effectively the company complies with regulations like the Generally Accepted Accounting Principles.
- Demonstrate regulatory compliance: Reporting verifies the organization follows laws, regulations or internal policies, critical for upholding government contracts or navigating heavily regulated industries.
- Assess environmental, social and governance (ESG) performance: Auditors increasingly evaluate ESG data and disclosures, helping stakeholders understand the organization’s sustainability practices and social impact.
- Identify internal control weaknesses and risks: Audits can highlight gaps or inefficiencies in systems, processes or controls that could expose the organization to fraud, mismanagement or operational failure.
- Build stakeholder trust and accountability: Thorough audit reporting provides investors, boards, customers and regulators with independent assurance, enhancing transparency and credibility.
- Support decision-making and continuous improvement: Audits are one of the best ways to uncover actionable insights that help leaders strengthen governance, manage risk and drive continuous improvement.
When do auditors prepare their reports?
Before the audit, management provides financial information to the audit committee. During the annual audit, the auditor reviews the company’s processes and procedures to prepare the financial information. After the audit, the auditors prepare the audit reports, including checking whether the company uses GAAP or other applicable reporting frameworks.
The 5 C’s of audit reporting
Though the contents of an audit report can vary slightly based on the auditor’s opinion, most reports will include the auditor’s point of view on the 5 C’s of audit report writing. These are:
- Condition: What is the item being reviewed?
- Criteria: What did the organization meet or fail to meet? This could range from a misstatement to a regulatory infraction.
- Cause: What made the issue possible?
- Consequence: What is the outcome of the auditor’s finding?
Corrective action: How should the organization mitigate the issue?
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Get the free checklistThe 4 types of audit reports (audit opinions)
In an audit report, the audit opinion is the section explaining the audit results.
The audit opinion is based on several variables. For example:
- How available the data was to them
- Whether they had an opportunity to follow all due procedures
- The level of materiality
An adverse audit opinion can damage a company’s status. In some cases, adverse audit opinions may lead to litigation. Regulatory bodies may also scrutinize the audit opinion and the audit report to verify the information for accuracy and any impact on taxation matters.
Auditors can choose among four different types of auditor opinion reports. An auditor's opinion report is a letter that auditors attach to the statutory audit report that reflects their opinion of the audit. The four audit opinion types are:
- Unqualified (clean)
- Qualified
- Disclaimer of opinion
- Adverse
Unqualified (clean) audit report
An unqualified opinion is considered a clean report. This is the type of report that auditors give most often. It is also the type of audit report that most companies expect to receive.
An unqualified opinion doesn’t have any adverse comments, and it doesn’t include any disclaimers about any clauses or the audit process.
Why an auditor issues an unqualified opinion
This report indicates that the auditors are satisfied with the company’s financial reporting. The auditor believes the company’s operations comply with governance principles and applicable laws. The company, the auditors, the investors and the public perceive such a report to be free from material misstatements.
Unmodified opinion
An unmodified opinion is the same as an unqualified opinion, but the difference comes down to context. Clean audit reports for publicly listed companies have an unqualified opinion, while those same reports for private companies are considered unmodified.
Qualified audit report
A qualified opinion results in a qualified report. It typically indicates that the auditor isn’t confident about any specific process or transaction, which prevents them from issuing an unqualified or clean report. Investors don’t find qualified opinions acceptable, as they project a negative opinion about a company’s financial status.
Auditors write up a qualified opinion in much the same way as an unqualified opinion, with the exception that they state the reasons they’re not able to present an unqualified opinion.
Why an auditor issues a qualified opinion
An auditor will give a qualified opinion and a qualified report if they can’t confidently clear the organization's financial statements or financial reporting practices. A common reason for auditors issuing a qualified opinion is that the company didn’t present its records with GAAP.
Disclaimer of opinion – disclaimer report
A disclaimer of opinion results in a disclaimer report. When an auditor issues a disclaimer of opinion report, it means that they are distancing themselves from providing any opinion at all related to the financial statements.
The general consensus is that a disclaimer of opinion constitutes a very harsh stance. As a result, it creates an adverse image of the company.
Why an auditor issues a disclaimer of opinion
Some of the reasons that auditors may issue a disclaimer of opinion are because they felt like the company limited their ability to conduct a thorough audit or they couldn’t get satisfactory explanations for their questions. They may not have been able to decipher the correct nature of some transactions or to secure enough evidence to support good financial reporting.
Auditors who aren’t allowed an opportunity to observe operational procedures or to review particular procedures may feel like they’re not able to express a definite opinion, so they feel a disclaimer is necessary and in order.
Adverse opinion – adverse audit report
The final type of audit opinion is an adverse opinion. An auditor’s adverse opinion is a big red flag. An adverse audit report usually indicates that financial reports contain gross misstatements and have the potential for fraud.
Why an auditor issues an adverse opinion
Auditors who aren’t at all satisfied with the financial statements or who discover a high level of material misstatements or irregularities know that this creates a situation in which investors and the government will mistrust the company’s financial reports.
Adverse opinions send out a high alert that the company’s records haven’t been prepared according to GAAP. Financial institutions and investors take this opinion seriously and will reject doing any kind of business with the company.
What are the components of an audit report?
Audit reports typically have seven different components ranging from the auditor’s signature to their recommendations for the audited company. These components are:
- Title: Most audit report titles should be straightforward and can indicate whether the auditor is independent or not.
- Introduction: This section is typically a short paragraph that includes the company and duration under audit.
- Scope: This section is roughly a paragraph and defines what the auditor reviewed.
- Executive summary: The auditor briefly summarizes the audit results and their opinion.
- Opinion: Following the executive summary, the auditor will provide more detail about their opinion and what it means for the organization.
- Auditor’s name and signature: The auditor will close the report with their name and signature.
The benefits of audit reporting for businesses and investors
Audit reports play a vital role within companies and in the broader financial ecosystem. Comprehensive reports are the engine of continuous improvement, as well as the independent assurance that investors, lenders, and regulators seek regarding company finances and operations.
“Right now, there is a deluge of data coming at directors, and knowing what's important and what's not, as well as managing that information flow, can be a challenge. Diligent streamlines audit reporting so that you’re not just getting data, you’re getting insights that can help identify risks and opportunities to drive the business forward,” says Ellen Masterson, Independent Director/Governor at Westwood Holdings Group, The Doctors Company and Insperity.
These benefits and more are what make audit reporting foundational to good governance.
Key benefits for businesses
- Build trust with investors and partners: A clean audit report signals that your financials are accurate and well-managed, boosting credibility with stakeholders.
- Improve access to funding: Lenders and investors use audit reports to assess risk. Strong reports can unlock better loan terms or investor confidence.
- Strengthen internal processes: Audit findings often reveal inefficiencies or control issues, giving you a roadmap to improve operations and reduce risk.
- Support legal and regulatory compliance: Audits prove whether your business meets financial reporting standards and avoids penalties or reputational harm.
- Enabling smarter decisions: Audits help ensure your business meets financial reporting standards to make strategic moves from scaling to restructuring.
How audit opinions build stakeholder trust
- Provide an independent assessment: An auditor’s opinion validates whether your financials are fair and compliant with accounting standards, which reassures stakeholders of your standing.
- Signal potential risks: Most stakeholders prefer stability over surprises. Qualified or adverse opinions proactively alert investors, regulators and partners to financial or compliance concerns.
- Demonstrate strong governance: A history of clean audits shows you prioritize transparency, accountability and ethical management.
How investors and lenders use audit reports
- Evaluate financial health: Investors use audit reports to understand their financial position and predict future performance.
- Assess leadership and controls: Clean audits suggest strong financial oversight; repeated issues may raise red flags about governance.
- Compare companies across markets: Audited financials allow direct comparisons between companies, which supports investors’ portfolio strategies and benchmarking.
Real-world audit report examples
Coca-Cola
Coca-Cola Bottlers Business Services (CCBBS) had a robust Data Intelligence and Analytics team. CCBBS relied on the team to manage large volumes of data to understand business needs, ensure compliance and deliver strategic insights organization-wide. However, the team generated key audit reports manually in Excel, taking up to two days due to the size and complexity of the data sets.
CCBBS began automating its audit reporting with Diligent Audit Management, reducing the process to just five minutes and freeing up substantial staff time for more strategic audit functions.
“I used to run the segregation of duties report in Excel. And it would take me about two days just to complete the report because we’re working off very big files. With [Diligent Audit Management], I’m able to run the report in five minutes,” says Dior Silo, Compliance and Analytics Manager Coca-Cola.
The company streamlined its entire audit function by:
- Automating labor-intensive audit reporting
- Transforming large datasets into actionable insights quickly and efficiently
- Delivering analytics reports across departments with ease
- Reducing manual effort and response time for audit presentations and SOX compliance activities
- Enhancing its capacity to measure audit value by tracking time saved, risk areas identified and realized savings opportunities
Epiroc
Even organizations that use technology can struggle to deliver consistent, high-quality audit reporting. Epiroc was leveraging an audit tool, but it was inefficient and delayed in generating audit reports; some reports took up to four weeks after the team finalized fieldwork. The company’s audit function needed more flexibility and features to keep up.
With Diligent Audit Management, Epiroc:
- Reduced the time to generate internal audit reports dramatically, with some being completed while still on-site
- Increased engagement from audit team members worldwide, who responded very positively to the new system.
- Saved time across the audit function
- Allocated additional responsibilities to the audit team, such as balance sheet reviews and corporate investigations, alongside regular audits
Daikin Australia
Daikin Australia had a small internal audit team with extensive responsibilities.
“Over the last eight years that I’ve worked at Daikin, the size of the audit team has remained fairly stable – but the company has grown, and we’ve got more subsidiaries to service,” says Daikin Australia National Risk and Assurance Manager Vincent Verlinde.
The team oversaw compliance activities across 39 locations and various regulations, spanning national and international standards and myriad regular and ad hoc audits. Adopting Diligent Audit Management centralized and automated audit documentation and reporting.
Verlinde says, “By using [Diligent] to optimize the efficiency of our audit process, we’ve been able to maintain the same number of resources in our team.”
With audit software behind them, Daikin Australia can:
- Quickly consolidate funding and easily produce impactful, board-ready reports
- Automate critical parts of the audit process, including investigations, reducing the need for travel and on-site time by half
- Answer board queries quickly and track audit findings over time to support enhanced oversight
- Enable the team to develop and deliver more strategic insights in less time
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Discover the guideObtaining a favorable audit opinion
Auditors form their opinions by making professional judgments and getting legal opinions. To satisfy auditors’ keen eye and earn an unqualified opinion, it’s vital that companies:
- Implement internal controls: Internal controls not only lead to better financial statements, but they also make financial performance more defensible to auditors.
- Create strong financial policies: It’s easier to build a compliant financial reporting process than it is to fix one with deep-seated flaws. Create and implement policies with GAAP in mind.
- Conduct regular reviews: Organizations should have financial controls and policies reviewed regularly by the company’s internal audit team to ensure that everything is in order before the audit ensues.
- Utilize software solutions: Board management software programs support the accountability and transparency of financial reporting to ensure that companies get the best auditor opinion letter, while audit management solutions ensure that companies are well-positioned to earn unqualified opinions in their audit reports. AI adds another layer of efficiency, automating manual audit workflows so audit teams can do more with less. It drives efficiency across the audit workflow with built-in best practices and a solution that scales with you.
How software and AI are influencing audit reports
Technology has already transformed the audit landscape, making reports more accurate, efficient and insightful. However, AI and automation are pushing the boundaries of how businesses and auditors work together.
- Faster, more accurate audits: Advanced audit software streamlines data collection, reconciliation and testing procedures. Think of generating board-ready audit reports in a single click, providing real-time insight into audit stats and funding, and aggregating audit issues across projects. These features reduce manual errors and increase the speed of audits without sacrificing quality.
- Real-time risk detection: A challenge of the traditional audit process is that auditors often intervene after a risk has already unfolded and had a material impact. AI algorithms can continuously scan data to identify trends, emerging risks and critical issues faster and more accurately.
- Enhanced data analytics: Audit platforms now integrate with enterprise systems to analyze large volumes of financial, operational and ESG data from internal and external sources. Integrative AI models can also use this data to produce context-rich, actionable reporting. This helps audits provide more nuanced insights to the board beyond compliance checks.
- Standardization and consistency: Spreadsheets and manual processes are difficult to scale consistently. Automation and dynamic workflows allow for standardized, repeatable audit reporting practices, which can unlock a more agile audit process that can grow as the organization does.
- Improved collaboration and transparency: Cloud-based audit tools allow for real-time collaboration between auditors and clients. Audit trails, dashboards and automated documentation further improve visibility and accountability throughout the process, reinforcing the internal audit’s value as a trusted partner.
- Better decision support: AI-enhanced reporting tools validate numbers instantly, but predictive analytics also offer forward-looking insights, helping leadership assess trends, benchmark performance and plan with greater precision.
Modernize your approach to audit reporting
Auditors use all types of qualified reports to alert the public as to the transparency, reliability and accountability of companies. Auditor opinions place pressure on companies to change their financial reporting processes and pay closer attention to practices like ESG so that they’re clear and accurate. Companies, investors and the public highly value unqualified reports.
Efficient management of the audit process, coupled with a modernized approach, allows your organization to stay ahead of emerging risks. From empowering informed decision-making to automated, time-saving processes, Diligent’s Audit Management solution helps you to deliver audit reports with ease.
FAQs
Are audit reports required for all companies?
Not all companies are required to have audit reports. Public companies, nonprofits and businesses that receive government funding are legally required to undergo audits. However, private companies may still choose to get audited to improve credibility with investors, lenders or partners. Requirements also vary by industry, revenue thresholds and regulatory bodies.
Is an audit report the same as a financial audit?
Not exactly. A financial audit is the process of reviewing and verifying a company’s financial statements, while the audit report is the formal document that summarizes the auditor’s findings and opinion. The report states whether the financials are fairly presented and comply with accounting standards, making it the final outcome of the audit.
Who prepares an audit report, and who reads it?
An independent auditor or audit firm prepares the audit report after conducting a detailed review of a company’s financials, systems or compliance. The report is then read by a wide range of stakeholders, including investors, lenders, board members, regulators and internal leadership, all of whom use it to assess financial health, risk and credibility.
What should I look for when reading an audit report?
Key elements to focus on in an audit report include:
- The auditor’s opinion (unqualified, qualified, adverse, or disclaimer)
- Any notes on internal control weaknesses or noncompliance
- Explanatory paragraphs that highlight areas of concern
- The scope and limitations of the audit
- Whether the report was prepared by a recognized, independent audit firm
These sections help you quickly understand the company's financial health and reliability.
What is the difference between a qualified and adverse audit opinion?
A qualified opinion means the auditor found some issues but overall believes the financial statements are fairly presented except for a specific area. An adverse opinion, however, indicates the financial statements are materially misstated and do not accurately reflect the company’s financial position, posing a serious red flag for stakeholders.
What is the difference between a qualified and an unqualified audit report?
An unqualified audit report — also called a clean opinion — means the auditor found no material misstatements and the financial statements are accurate and compliant. A qualified audit report points out one or more areas that don’t fully meet accounting standards but doesn’t invalidate the entire report.
Can a company operate with an adverse or disclaimer audit report?
Yes, a company can continue operating with an adverse or disclaimer audit opinion, but the consequences can be serious. These reports may damage credibility, reduce investor and lender confidence and make it harder to secure funding, contracts or regulatory approval. Some industries may require a clean audit to stay in business.
What are the common reasons auditors issue a qualified opinion?
Qualified opinions are often issued due to:
- Incomplete or missing documentation
- Limited access to financial records
- Noncompliance with accounting standards (GAAP or IFRS)
- Disagreements with management about accounting treatments
- Unresolved audit scope limitations
These issues typically affect specific areas of the financials rather than the entire report.
How often do companies receive modified audit reports?
Most companies strive for an unqualified (clean) report, but modified opinions — including qualified, adverse or disclaimer reports — are not uncommon, especially in industries with complex accounting rules. The frequency depends on factors like company size, internal controls, transparency and industry regulation.
How do audit reports impact investor decisions?
Audit reports play a significant role in investment decisions. Investors use them to:
- Assess financial health and risk
- Evaluate transparency and governance
- Spot red flags, like qualified or adverse opinions
- Compare companies across the same sector
- Decide how much to invest or whether to invest at all
A clean audit can enhance investor confidence, while a modified report may lead to caution or withdrawal.
How is AI used in the auditing process today?
AI is transforming auditing by:
- Automating repetitive tasks, like data extraction and reconciliations
- Analyzing large datasets to detect anomalies, trends or fraud
- Improving risk assessments with predictive analytics
- Enhancing audit quality and consistency across reports
- Speeding up the audit cycle, reducing time and cost
AI tools help auditors focus on high-risk areas and deliver deeper insights, improving both efficiency and accuracy.
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