Auditor’s Report and Other Information Sources | CFA Level I FSA

Welcome back! In this lesson, we’ll explore the auditor’s report and other sources of information, like interim reports, proxy statements, press releases, and earnings guidance. Let’s dive in!

Auditor’s Report

An audit is an independent review of a firm’s financial statements by an independent certified public accountant. The objective of an audit is to provide an opinion on the fairness and reliability of the financial statements. The standard auditor’s opinion contains three key elements:

• The financial statements are prepared by the management and are its responsibility.
• Generally accepted auditing standards were followed, providing reasonable assurance that the financial statements contain no material errors.
• An opinion on whether the statements were prepared in accordance with accepted accounting principles.

There are different types of auditor’s opinions:

• Unqualified Opinion: Indicates that the auditor believes the statements are free from material omissions and errors.
• Qualified Opinion: Issued if there are exceptions to the accounting principles, explained in the audit report.
• Adverse Opinion: Issued if the statements are not presented fairly or are materially nonconforming with accounting standards.
• Disclaimer of Opinion: Issued if the auditor is unable to express an opinion for any reason.

In the US, auditors must also express an opinion on the firm’s internal control systems, which are the processes ensuring accurate financial statements.

Other Sources of Information

Besides the major financial statements, analysts can examine other relevant reports:

Interim Reports

Provide updated information on a company’s performance and financial position since the last annual report. They are published either semiannually or quarterly and generally present basic financial statements and condensed notes, but are not audited.

Proxy Statements

Issued to shareholders when there are matters that require a shareholder vote. Good sources of information about board member elections, compensation, management qualifications, and stock option issuance.

Corporate Reports and Press Releases

Released by management and often viewed as public relations or sales materials. Not all material is independently reviewed by outside auditors.

Earnings Guidance

Provided before the financial statements are released. Announced slightly ahead of the actual release, so usefulness may be somewhat limited.

Besides these reports, analysts should also review information on economic conditions, the company’s industry, and competitor comparisons. This information can be acquired from trade journals, statistical reporting services, and government agencies.

And that’s it for this lesson on auditor’s reports and other information sources! Up next, we’ll discuss a formal framework an analyst can follow to analyze financial statements. Stay tuned!