Important Warning to Look for in an Auditor's Report - dummies

Important Warning to Look for in an Auditor’s Report

In most cases, the auditor’s report confirms that everything in a financial report is hunky-dory, and you can rely on the financial report. However, sometimes an auditor waves a yellow flag — and in extreme cases, a red flag.

Here are the two important warnings to watch out for in an audit report:

  • The business’s capability to continue normal operations is in doubt because of what are known as financial exigencies, which may mean a low cash balance, unpaid overdue liabilities, or major lawsuits that the business doesn’t have the cash to cover.

  • One or more of the methods used in the report are not in complete agreement with appropriate accounting standards, leading the auditor to conclude that the numbers reported are misleading or that disclosure is inadequate.

Although auditor warnings don’t necessarily mean that a business is going down the tubes, they should make you more cautious and skeptical about the financial report. The auditor is questioning the information on which the business’s value is based, and you can’t take that kind of thing lightly.

Just because a business has a clean audit report doesn’t mean that the financial report is completely accurate and aboveboard. Auditors don’t always catch everything, and they sometimes fail to discover major accounting fraud. Also, the implementation of accounting methods is fairly flexible, leaving room for interpretation and creativity. Some massaging of the numbers is tolerated, which may mean that what you see on the financial report isn’t exactly an untarnished picture of the business.