50. Explain the 4 types of (external) Audit Opinions! Which type do banks require for assessing the credit risks of customers?

There are four types of external audit opinions, and namely, unqualified (aka clean), qualified, adverse and disclaimer opinions. An unqualified (clean) audit opinion means that auditors could not find any noteworthy violations or misstatements in a company’s financial information. A qualified audit opinion implies that auditors discovered issues in a company’s financial information which prevent them from issuing a clean opinion. An adverse opinion means that auditors found significant, material misstatements in a company’s financial information such as violation of GAAP and inaccurate, unreliable information. A disclaimer opinion is the worst audit opinion a company may receive, and is given when auditors are unable of forming an opinion on the company’s financial statements.

To assess credit risk on a consumer loan, banks look at the five C’s: customer’s credit history, his capacity to repay, his capital, the loan’s conditions and associated collateral. The interest rate must be adjusted to any cha nges in the level of perceived credit risk, meaning credit risk is assessed on a regular basis regardless of the audit opinion received.