Auditor report in the annual report

The auditor report in a company’s annual report is a short section that very few people seem to pay attention to. In my opinion, it is worth reading the auditor report carefully, to understand what the purpose of an audit is, how it is performed, and what the scope and limitations are.

The core message in this discussion of the auditor report is: absence of evidence does not necessarily equal evidence of absence. Keep that message in mind, its meaning will become clearer along the way, and I will illustrate it with an example at the end of the video.

We will take an example of the auditor report from the annual report of a real-life company called Alphabet Inc (the parent company of Google), with the audit performed by a real-life audit firm called EY, short for Ernst and Young. The wording in auditor reports seems fairly similar, so once you understand how this works for one company and its audit firm, you will probably recognize most of the wording for any annual report that you pick up.

Where do you find the auditor report? For a company listed in the US, using form 10-K to report its annual financial results, it is included in item 8 financial statements and supplementary data. The auditor report actually has two parts: an opinion on the financial statements, and an opinion on internal control over financial reporting.

Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the business vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investment decisions. Philip delivers training in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!

[Chironex_Fleckeri]

Yeah! The key words are "reasonable assurance." The auditor sets an audit risk, basically the level of acceptable overall risk that their opinion will be wrong. There are four audit opinions:
1)Unqualified ("clean", the financial statements conform to GAAP)
2)Qualified (Except for X material misstatement, the financial statements conform to GAAP)
3)Adverse (The financial statements have highly material and pervasive misstatements.)
4) Disclaimer of opinion (refusal to give an opinion due to factors like lack of independence or appearance of independence)

90/100 audit reports will be standard and give unqualified opinions, meaning there are no "they're reporting things accurately buuuut, except for, however". It doesn't refer to auditor or managerial qualifications, just the linguistic qualifier words.

There is one other basic thing. An audit report can contain an unqualified opinion, meaning their financial statements are reasonably assured to conform to GAAP (free of material misstatements), BUT you can sometimes see the auditor include an explanatory paragraph that includes "substantial doubt as to the ability of X Corp. to continue as a going concern." So that means a clean opinion was rendered BUT the auditor noticed that the company's financials look really ugly. So ugly that they are saying "we think you may not be operating in a year or so."

[jacobhernandez]

Thank you for this I’m new to everything and I was looking through the sec trying to find this report . Thank you !

[shivjayvolvloikar]

Hello storyteller, which is the best book for understanding financial statements with examples given in it?