Auditor’s Report and Other Information Sources | CFA Level I FSA
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.
Additional Reports and Statements
Beyond the auditor’s report, analysts should examine:
- Interim Reports: Provide performance updates since the last annual report, typically unaudited.
- Proxy Statements: Offer insights on board elections, compensation, management qualifications, and stock options.
Footnotes and Segment Reporting
Footnotes, an integral part of financial statements, shed light on accounting methods, assumptions, and additional material information such as business acquisitions, legal actions, and segment data. Specifically, segment reporting under US GAAP and IFRS requires disclosure of revenue, profit or loss, and assets for each significant segment, offering a clearer picture of a firm’s diversified operations.
Management’s Discussion and Analysis (MD&A)
The MD&A section allows management to discuss past performance, business outlook, and significant events. It covers the effects of inflation, off-balance-sheet obligations, significant judgment areas in accounting, and future expenditures, providing a narrative context to the figures presented in the financial statements.
Exploring Other Information Sources
An analyst’s toolkit is not limited to formal reports. Corporate press releases, earnings guidance, and management conference calls offer timely insights. Additionally, industry reports, government statistics, media articles, and proprietary data platforms enrich the analysis with broader economic and competitive perspectives.