AUDIT REPORT: WHAT EXACTLY IS AUDIT REPORT AND PURPOSE OF AUDIT REPORTING?
WHAT IS AUDIT REPORT?
Audit report in common term is the expression of opinion by an independent third party in this case an auditor as to the compliance and fairness of a set of financial statement of a company.
This is why most audit report begins with the phrase ‘in our opinion….’ This is to say that management has the primary responsibility for the effectiveness of the entity’s internal control over financial reporting and fair presentation of financial statements in conformity with generally accepted accounting principles (GAAP) and going concern.
Audit reporting is the last stage of audit engagement which includes: obtaining/ retaining engagement, planning the engagement, carrying out substantive procedures, carrying out risk assessment, and subsequently reporting.
Sarbanes Oxley Act 2002 and Accounting Standard 5 (AS 5) mandate auditors to prepare a report that covers both the effectiveness of a company’s internal control over financial reporting and comprehensiveness of financial statements. The report on internal control is presented only if an entity is a Securities and Exchange Commission (SEC) registrant.
Purpose of audit report
I am sure you are aware that the official definition of auditing includes the phrase “…communicating those results to interested users.” If this is true, then audit report is a medium through which auditors communicate to users three specific comments/ assertions bothering around the financial statements, the conduct of the audit, and the company in general:
- Auditors / audit report tells us whether the financial statements are prepared in accordance with GAAP or International Financial Reporting Standards (IFRS). The auditor in the audit report must indicate how financial statements would appear if compliance with IFRS is satisfied in a case where there is no conformity.
- Auditors through audit report draw the attention of the users of financial information to any unusual aspects of the audit examination. Auditors usually face restrictions/ constraints while auditing a company’s books of accounts. This is more prevalent when auditing in a corrupt environment. So, it is through the audit report that auditor highlights this. Auditors can also use their report to tell the users of accounting information that certain portion of the audit report where conducted by another firm.
- The third purpose of audit report is to report to financial statements users any other matter affecting the entity. Substantial doubts– auditors expression of concern about a company’s ability to continue as a going concern in a situation where an entity is experiencing significant financial difficulty– is one thing that should be contained in the audit report apart from conformity with GAAP or IFRS. For example, auditors can highlight the effects of changes in accounting principles on the comparability of financial statements.
Auditors give standard report when three conditions are not met VIZ:
- The financial statements presents fairly the financial conditions, results of operations, cash flows of the company are in accordance with the provision of IFRS;
- There are no unusual issues affecting the conduct of the audit; and
- The auditors do not need to draw the attention of the users of a company’s financial statements to any transaction or events
But because things are not always normal, even in a normal situation, we have other types of audit report that auditors can make.
TYPES OF AUDITORS OPINION
Unqualified opinion: this is the kind of opinion that auditors express when the financial statements are prepared in accordance with the relevant legislation and present fairly the state of affairs in the company.
Adverse opinion: here, the auditor expressed the opinion that the financial statement does not conform to GAAP and does not represent the true state of a company’s affairs.
Limitation of scope opinion/ disclaimer of opinion: auditors make this kind of opinion when they are unable to express opinion.
Qualified opinion: this is the direct opposite of unqualified opinion.
At the beginning of this article, I promised to explain what audit report is and to tell you the reason why auditors prepare audit report which we have done. But, don’t forget the fact that auditing is just like financial accounting that is prone to changes. To this end, it will be in your own interest if you just spend some more time reading other articles in this website and buying some of the audit report books displayed below.