Audit Report

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 business 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.

If you want to learn more about Auditing, you may consider taking courses offered by Coursera –

1. Auditing I: Conceptual Foundations of Auditing
2. Auditing II: The Practice of Auditing

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 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 opinion 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 statements. 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.

Contents

The audit report includes the following contents.

#1 – Title: The title should be an ‘Independent Auditor’s Report.’

#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.

Example

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 evidence. 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.

Important Points

Conclusion

For the companies, it is mandatory to get their financial statements audited. As discussed above, the auditor, after performing audit procedures, 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.

Recommended Articles

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 –

• Sample Audit Report Format
• Audit Report Examples
• Audit Report Contents
• Accounting vs Auditing