Qualified Audit Opinion in Hong Kong: What It Means

At a glance

The categories of opinion and their definitions follow the Hong Kong Standards on Auditing; the wording of any individual report is determined by the auditor according to the circumstances.

How the four differ

A simple way to hold them in mind:

Unqualified — “I saw everything, and there is no problem.”

Qualified — “I saw everything, and the rest is fine, but this one item is not.” The problem is local.

Adverse — “I saw everything, and the whole set cannot be relied on.” The problem is pervasive.

Disclaimer — “I could not see enough to form a view, so I am not commenting.” This does not say you are wrong; it says there is no evidence to judge on.

To an outside reader — a bank, an investor, a buyer — the last two do far more damage than a qualification.

There is one more thing that is often misread: an emphasis of matter paragraph. Alongside an unqualified opinion, the auditor draws the reader’s attention to something (litigation, a significant subsequent event). That is not a qualification — an extra paragraph does not mean something has gone wrong.

The two places small companies get caught

One: cash income.

Most common in retail, food and services. There is nothing wrong with taking cash. The problem is how the auditor verifies that you actually took that amount.

With no daily takings record, no till report and no matching bank deposit, there is nothing to verify against — so the opinion gets qualified.

The fix is not difficult: record each day’s takings, and bank them regularly. With those two in place, the large majority of cash-related qualifications simply do not arise.

Two: stock.

With no count at the year end date, the quantity can only be inferred from the books, and an auditor cannot accept “roughly this much”.

The fix is equally simple but has to be on time: count on the year end date or as close to it as possible, and write down item, quantity and cost. Once the date has passed, this one cannot be reconstructed.

What does a qualified opinion actually cost you?

Look at it from three sides.

The bank — the most immediate effect.

Loan applications, credit line renewals, opening a new account: the bank will look at the audit report. A qualification prompts questions about why; an adverse opinion or a disclaimer usually makes approval very hard.

The IRD — it draws attention.

A qualification is the auditor saying, in writing, “I could not verify this part”. The IRD sees that and will naturally pay closer attention to the same part, which raises the chance of an enquiry letter.

A transaction — it affects value.

If you plan to sell or bring in investors, the buyer’s due diligence will look. Qualified years get discounted, or you may be asked to have the work redone. It feeds through to the price on a share transfer as well.

What to do after receiving one

Step one: work out the reason. Do not stop at the word “qualified”. The auditor sets out the basis for the qualification in the report, and that paragraph is the point.

Step two: decide whether it is “could not be fixed this year” or a systems problem.

Some are one-off — opening balances on a first audit, for instance — and disappear next year of their own accord.

Some are systems problems — cash income with no records — and will recur every year until something changes.

Step three: if it is a systems problem, change it now. And change it at the start of the new financial year, not at the end of it, because the auditor looks at the whole year.

Step four: agree with the auditor exactly what has to be in place next year for the qualification to be removed. Ask this actively; do not wait to be told.

The most expensive approach: accepting it every year

Plenty of companies carry the same qualification for five or six years.

Each year the owner thinks “the report came out, so it can’t matter much” — until the day they need to borrow, sell or bring in an investor, and discover that all of those years get discounted.

And the harder part is that past years cannot be fixed. The system can change from today, but a report already issued cannot.

Which is to say the cost of this compounds, and it is not reversible.

How to avoid it from the start

The answer is dull but true: keep good day-to-day records.

Cash recorded daily, stock counted on time, the nature of current-account entries written down as they happen, the bank reconciled monthly — do those four and most qualifications never arise at all.

They are also exactly the material in what to prepare for your accountant. Get it right once and bookkeeping, audit and tax filing are all dealt with together.

We do bookkeeping and company secretarial work, which includes setting up this day-to-day record keeping and dealing with the auditor’s queries. The audit opinion itself is reached independently by a licensed accountant; our job is to leave no reason to qualify it.

Want someone to look at why this year’s report was qualified and what it takes to remove it next year? Talk to us.

This is general information and does not constitute audit or accounting advice. The category, definition and issue of an audit opinion are determined independently by the auditor under the Hong Kong Standards on Auditing; for your own situation, consult your auditor.