What is the Audit Report?
Once an external auditor finishes the auditing of a company, he goes ahead and formulates a report where he consolidates all the findings, observations and how he thinks the financial statements of the company are reported; this report is called audit report.
Audit Report is a written opinion of the reliability of the financial statements of the businessFinancial Statements Of The BusinessFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels. and is provided by the chartered accountants auditing the company.
The format of the audit report is fixed as per the generally accepted auditing standards. But certain changes are allowed to be made as per the requirement of the auditor, which depends upon the audit work circumstances.
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Audit Report Opinion Types
Let us discuss the following types.
#1 – Clean Opinion
An auditor gives an unqualified opinion, also known as an unqualified opinion if, according to him, the financial statements are true and fair, and there is no material misstatement in them.
#2 – Qualified Opinion
This type of audit reportType Of Audit ReportThere are four different types of the audit reports that the company's auditor can issue based on the analysis of the company’s financial statements. It includes Unqualified Audit Report, Qualified Audit Report, Adverse Audit Report, and Disclaimer Audit Report. opinion is given by the auditor if, in the financial statements, there is no material misrepresentation. Still, financial statement preparation is not in accordance with generally accepted accounting principles (GAAP).
#3 – Adverse Opinion
The worst type is the adverse opinionThe Adverse OpinionAn adverse opinion is the auditor's findings of misrepresentation and misstatement of the company's financial health and performance as identified in the financial statements. It is the conclusion of the professional assessment of the corporate accounts depicting false or unfair business practice. that an auditor can give. It reflects that the financial statements of an entity are materially misstated, misrepresented, and do not reflect its correct financial performance.
#4 – Disclaimer of Opinion
In case the auditor fails to frame an opinion about the financial statements of the company, then he gives a disclaimer of opinion. The reason for the disclaimer can be the lack of audit evidence or the restriction by the client to examine all the records etc.
The auditor issues the audit report to the users of the entity’s financial statementsUsers Of The Entity's Financial StatementsFinancial statements prepared by the Companies are used by different categories of individuals and corporates on the basis of their relevancy to the respective parties. The most common users to the financial statements are Management of the Company, Investors, Customers, Competitors, Government and Government Agencies, Employees, Investment Analysts, Lenders, Rating Agency and Suppliers.. All the investors and lenders require a clean report before investing in the business. The public companies must attach the audit report with the financial statements before filing it with the Securities and Exchange Commission.
The audit report includes the following contents.
#1 – Title: The title should be an ‘Independent Auditor’s ReportIndependent Auditor's ReportAn independent auditor report is a report issued by an independent auditor following an examination of an organization's financial statements, books of accounts, financial transactions, accounting practices, internal and external control. The auditor is an outsider appointed with the board's approval..’
#2 – Addressee: It should be mentioned to whom the auditor’s report is given. For example, in the case of a company auditor’s report is addressed to the members of the company.
#3 – Management Responsibility: After Addressee, the management responsibility towards the financial statement is to be written, which includes the responsibility of management towards the preparation and presentation of financial statements.
#4 – Auditor’s Responsibility: After management responsibility, auditor’s responsibility is to be written, which includes their responsibility to issue an unbiased opinion on the financial statements.
#5 – Opinion: Then, the auditor is required to write his own audit report opinion on the truth and fairness of the financial statements specifying the basis of such opinion.
#6 – Basis of Opinion: State the basis of the fact;
#7 – Other Reporting Responsibility: After all the above points, if there is any other reporting responsibility that exists, then the same is required to be mentioned, such as Report on Other Legal and Regulatory Requirements.
#8 – Signature: Then, the signature is to be done by the engagement partner of the audit firm. Below the name of the engagement partner and the audit firm, they provide the required input.
#9 – Place and Date: Then, finally, the place of signature and the date of signing are to be mentioned.
Suppose there is a company named XYZ in the U.S. As per the law prevailing in the U.S., XYZ is required to appoint an outside auditor who has to review its financial statements to ensure the accurateness of the financial statements.
After reviewing the financial statements of the company, the auditor will then issue the auditor’s report reflecting the opinion of the auditor about the accuracy of the financial statements along with its conformity to GAAP.
Advantages of the Audit Report
- The management is different from the auditor, so the auditor is independent to give his decision. So the auditor’s report can provide knowledge about the integrity and honesty of the management, i.e., whether the management of the company is true toward the company’s shareholders or not.
- It assures the financial statements as it is issued by the professional having an unbiased opinion as he is not a part of the management of the company. This report helps the users of the financial statements to get assured of the truth and fairness of the financial statement.
- It helps the stakeholders to get knowledge about the operational and financial position of the company. It helps the stakeholders to know the future prospects of the company as an auditor is required to report in its audit report if there are some issues with the company, which can affect its going concern. The problem affecting going concern can be the financial or non-financial problems that can make the company face.
Disadvantages/Limitation of Audit Reports
- Sometimes management does not provide auditor full access to the audit evidenceAudit EvidenceAudit evidence is information gathered by auditors during the course of an audit, whether internal, statutory, or otherwise. These facts serve as the foundation for the opinion in the audit report.. As per the auditing standards, management should provide all the information that is demanded by the auditor, but in real life, the management may prevent the auditor get access to sensitive information as they may have doubts about the confidentiality of the auditor. These kinds of problems may affect the quality of the auditor’s opinion.
- It is required that the auditor should be independent of their client. But sometimes the client may influence the auditor, which results in the issuance of the incorrect report by the auditor.
- Time constraint is again an issue faced by the auditor. In real practice, the auditor does not get enough time to perform their audit procedures; as a result, there is a chance that errors and frauds remained undetected.
- The opinion of the auditor mostly covers the financial statements prepared for the period of 12 months or 1 financial year. This report is then used by the stakeholders, management, investors, the board of directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. , the government body, lenders, and other parties having their interest in the business.
- This is used by the investors to assess the financial performance of the entity as on the basis that only they will decide whether to invest in that company or not.
- This is used by the Government agency to assess the accuracy and completeness of tax declaration and to check that there is no tax evasion.
- It is used by the ShareholdersThe ShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares. and the board of directors for assessing the transparency of the financial statement and integrity of the management.
For the companies, it is mandatory to get their financial statements audited. As discussed above, the auditor, after performing audit proceduresPerforming Audit ProceduresAudit Procedures are steps performed by auditors to get evidence regarding the quality of the financial information provided by the management of a company. It enables them to form an opinion on financial statements and ensure whether they reflect the true and fair view or not. , issues an audit report, which can be one out of the four types of opinions depending upon the nature of material misrepresentation or misstatement detected by the auditor and if no misstatement is detected then the auditor issues a clean report.
This has been a guide to what is the Audit Report and its definition. Here we discuss the importance of audit reports, along with examples, advantages & disadvantages. You can learn more about from the following articles –