Audit Report
Explanation
An audit report is a written opinion
of an auditor issued by either an internal auditor or an independent external
auditor as a result of an internal or external audit regarding an entity's
financial statements. The report is written in a standard format, as mandated
by generally accepted auditing standards (GAAS). GAAS requires or allows
certain variations in the report, depending upon the circumstances of the audit
work in which the auditor engages.
An audit report is considered an
essential tool when reporting financial information to users, particularly in
business. Since many third-party users prefer, or even require financial
information to be certified by an independent external auditor, many auditees
rely on auditor reports to certify their information in order to attract
investors, obtain loans, and improve public appearance. Some have even stated
that financial information without an auditor's report is "essentially
worthless" for investing purposes.
Form
and Contents of Audit Report
As per the AAS 28, the audit report
should contain the following basic elements in it:
Title of the Report.
Addressee.
Opening or Introductory Paragraph.
Scope Paragraph.
Opinion Paragraph.
Signature.
Place of Signature.
Date of the Report.
1. Title of the Report
The title of
the report should be appropriate i.e., Auditor’s Report, Cost
Auditor’s Report, etc. It enables the readers to identify the auditor’s
report and also distinguish it from the reports of others such as
director’s report, accountant’s report, etc.
2. Addressee
The auditor’s report should be addressed to the person
to whom it should be forwarded. Generally, it is submitted to the person who
appoints the auditor. Hence, the addressee is a person who appoints the auditor
and to whom the report is forwarded. In case of the statutory audit of a
company, it is the shareholders who are the addressee.
3. Opening or Introductory Paragraph
It consists
of the identification of the following aspects:
- Financial
Statements Audited: Financial statements are
identified by name of the company and the period covered by the
financial statements.
- Clear Marking of Responsibility between the
Management and the Auditor: It should state clearly that
the financial statements are the responsibility of the entity’s management
and that the responsibility of the auditor is to express an opinion
thereon.
4. Scope Paragraph
The scope
paragraph should specify the nature and scope of the work performed by the
auditor. It should state that the audit was conducted as per the auditing
standards generally accepted in India and that the audit was planned and
performed to obtain assurance that the financial statements are free
of material misstatement.
Then it
should specifically describe the audit as including — an examination, on a test
basis, of evidence supporting the financial statements, assessment of
accounting principles followed and of significant estimates made by the
management, and overall evaluation of financial statement presentation.
Besides, it should also state that the audit provides a reasonable basis for
the auditor’s opinion.
5. Opinion Paragraph
The opinion paragraph of the auditor’s report should
clearly specify the financial reporting framework such as accounting principles
generally accepted in India used to prepare the financial statements and state
the auditor’s opinion as to whether the financial statements give a true and
fair view in accordance with that financial reporting framework and whether they
comply with the statutory requirements.
6.
Signature
The auditor in his personal name should sign the
auditor’s report. The audit report should be signed in the personal name of the
auditor and also in the name of the audit firm if it was appointed as the
auditor. While signing the report, the membership number of the partner
or proprietor, assigned by ICAI should be mentioned.
7. Place of Signature
The report should specify the
location, where the audit report is signed. That is the town or city where the
report is signed should be mentioned specifically here.
8. Date of
the Report
The date of
auditor’s report on financial statements indicates the date when the
report is signed by the auditor with his views and opinions about the financial
statements of the company he audited. This gives a clear picture that the
auditor has considered the effect, on the financial statements and on the audit
report, of the events and transactions that occurred, and of which the auditor
became aware, up to that date. Further, the auditor report should not predated
than the date on which the financial statements are signed or approved by the
management.
Component of an Audit
Report
An audit report is a report card
about the health of your financial statements and accounting internal controls.
It sums up the auditor’s findings and gives you recommendations for improving
your accounting system. The audit report is divided into the same components
that make up the audit procedures. The report also contains the auditor’s
opinion that he formed while conducting the audit. If you received an
unqualified opinion, your financial statements and internal accounting controls
passed. The financial reports were prepared according to accepted accounting
standards, and your accounting controls are adequate.
1. Introductory
Section
The
introductory section identifies whom the audit report was prepared for. It
states why the audit was conducted and names the person who conducted the
audit. The introduction confirms the representations you made about the
accuracy of your financial statements and business information. The
introduction gives an overview of your business operations, the long-term
financial planning and your cash management policies and practices. It assesses
your insurance policies as part of your risk management planning. The
introduction also contains an organizational chart identifying the employees
and their responsibilities in your business.
2. Financial
Section
The
financial section is an assessment of your financial statements based on the
auditor’s testing. The auditor identified which financial statements were
tested and confirmed that the audit was conducted in accordance with generally
accepted auditing standards. The income statement and balance sheet are
normally examined during the audit. The financial section discloses the test
sample scope and includes the auditor’s opinion of whether your financial
statements conform to Generally Accepted Accounting Standards.
3. Required
Supplemental Section
Documents
that are needed to clarify information contained in the financial statements
are found in the required supplemental section. These documents are not part of
your financial statements but are additional stand-alone documents. For
example, a required supplemental document would compare your budgeted inventory
projection with the actual inventory consumed. The auditor is responsible for
examining and test sampling the supplemental information. The auditor must
disclose if the supplemental documents are inadequate or if you decided not to
provide them.
4. Findings and
Recommendations Section
The
audit report winds up with a list of findings that identifies where your
accounting system could be improved. The auditors provide specific
recommendations that you may decide to implement. For example, the auditor may
recommend that you set up a system to investigate the reasons for a large
divergence between the estimated merchandise sales and the actual amount sold.
The auditor will also include information about the benefits associated with
implementing the suggested recommendations.
There are
six specific steps in the audit process that should be followed to ensure a
successful audit.
1.
Requesting
Documents
After
notifying the organization of the upcoming audit, the auditor typically
requests documents listed on an audit preliminary checklist. These documents
may include a copy of the previous audit report, original bank statements,
receipts and ledgers. In addition, the auditor may request organizational
charts, along with copies of board and committee minutes and copies of bylaws
and standing rules.
2.
Preparing
an Audit Plan
The auditor
looks over the information contained in the documents and plans out how the
audit will be conducted. A risk workshop may be conducted to identify possible
problems. An audit plan is then drafted.
3.
Scheduling
an Open Meeting
Senior
management and key administrative staff are then invited to an open meeting
during which the scope of the audit is presented by the auditor. A time frame
for the audit is determined, and any timing issues such as scheduled vacations
are discussed and handled. Department heads may be asked to inform staff of
possible interviews with the auditor.
4.
Conducting
Fieldwork
The auditor
takes information gathered from the open meeting and uses it to finalize the
audit plan. Fieldwork is then conducted by speaking to staff members and
reviewing procedures and processes. The auditor tests for compliance with
policies and procedures. Internal controls are evaluated to make sure they're
adequate. The auditor may discuss problems as they arise to give the
organization an opportunity to respond.
5.
Drafting a
Report
The auditor
prepares a report detailing the findings of the audit. Included in the report
are mathematical errors, posting problems, payments authorized but not paid and
other discrepancies; other audit concerns are also listed. The auditor then
writes up a commentary describing the findings of the audit and recommended
solutions to any problems.
6.
Setting Up
a Closing Meeting
The auditor
solicits a response from management that indicates whether it agrees or
disagrees with problems in the report, a description of management's action
plan to address the problem and a projected completion date. At the closing
meeting, all parties involved discuss the report and management responses. If
there are any remaining issues, they're resolved at this point
4 Type Audit Report of Audit Reports
An audit report is an appraisal of a
small business’s complete financial status. Completed by an independent
accounting professional, this document covers a company’s assets and
liabilities, and presents the auditor’s educated assessment of the firm’s
financial position and future. Audit reports are required by law if a company
is publicly traded or in an industry regulated by the Securities and Exchange
Commission (SEC). Companies seeking funding, as well as those looking to
improve internal controls, also find this information valuable. There are four
types of audit reports.
1.
Unqualified Opinion
Often
called a clean opinion, an unqualified opinion is an audit report that is
issued when an auditor determines that each of the financial records provided
by the small business is free of any misrepresentations. In addition, an
unqualified opinion indicates that the financial records have been maintained
in accordance with the standards known as Generally Accepted Accounting
Principles (GAAP). This is the best type of report a business can receive.
Typically, an unqualified report consists of a title that includes the word
“independent.” This is done to illustrate that it was prepared by an unbiased
third party. The title is followed by the main body. Made up of three
paragraphs, the main body highlights the responsibilities of the auditor, the
purpose of the audit and the auditor’s findings. The auditor signs and dates
the document, including his address.
2.
Qualified Opinion
In
situations when a company’s financial records have not been maintained in
accordance with GAAP but no misrepresentations are identified, an auditor will
issue a qualified opinion. The writing of a qualified opinion is extremely
similar to that of an unqualified opinion. A qualified opinion, however, will
include an additional paragraph that highlights the reason why the audit report
is not unqualified.
3.
Adverse Opinion
The
worst type of financial report that can be issued to a business is an adverse
opinion. This indicates that the firm’s financial records do not conform to
GAAP. In addition, the financial records provided by the business have been
grossly misrepresented. Although this may occur by error, it is often an
indication of fraud. When this type of report is issued, a company must correct
its financial statement and have it re-audited, as investors, lenders and other
requesting parties will generally not accept it.
4.
Disclaimer of Opinion
On
some occasions, an auditor is unable to complete an accurate audit report. This
may occur for a variety of reasons, such as an absence of appropriate financial
records. When this happens, the auditor issues a disclaimer of opinion, stating
that an opinion of the firm’s financial status could not be determined.
Preparation
of the Audit Report
An audit of a
company’s financial statements should result in a report wherein the accountant
or auditor is free to share their opinion about the validity and reliability of
a company’s financial statements.
In this report, the
auditor should provide an accurate picture of the company and their financial
statements. The auditor should also state whether they are externally or
internally connected to the company.
Within the report, the
auditor can share any reservations about the condition of the company’s
finances or relevant additional information. Reservations could arise if the
auditor disagrees with something found in the financial statements, e.g. if the
auditor disagrees with management about the valuation of an asset
because they believe that this has a more significant impact on the financial
statements.
In
the report
There are rules
concerning what an auditor's report should include and the order in which
various items should be reported.
Auditor's reports must
adhere to accepted standards established by governing bodies. Standards such as
those set by the UK Generally Accepted Accounting Practice (UK GAAP) help to
assure external users that the auditor's opinion on the fairness of financial
statements is based on a commonly accepted framework.
Example of Audit Report :
Reference:
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