Audit Reports

An auditor’s report is a written letter from the auditor containing their opinion on whether a company’s financial statements comply with generally accepted accounting principles (GAAP) and are free from material misstatement.

The audit report is the report that contains the audit’s opinion, which independent auditors issue after they examine the entity’s financial statements and related reports. Those including financial statements, management accounts, management reports. Or others report like compliant reports. Mostly, those reports are issued based on auditors’ professional examination against the measurement criteria or standards.

The independent and external audit report is typically published with the company’s annual report. The auditor’s report is important because banks and creditors require an audit of a company’s financial statements before lending to them.

Constitutes:

• The audit report is important because banks, creditors, and regulators require an audit of a company’s financial statements.
• The auditor’s report is a document containing the auditor’s opinion on whether a company’s financial statements comply with GAAP and are free from material misstatement.
• An adverse report means that the financial statements might have had discrepancies, misrepresentations, and didn’t adhere to GAAP.
• A clean audit report means a company followed accounting standards while an unqualified report means there might be errors.

Types

Unqualified Audit Report (Clean Audit Report):

The auditor issued an unqualified audit report to financial statements when auditors found no material misstatements after their testing. Therefore, this report contains an unqualified opinion from an independent auditor.

The report showed that the entity financial statements are prepared and present true and fair and complying with the accounting framework being used.

This is a good sign for all kinds of stakeholders that willing to uses the financial statements. You might find whether the audit report is clean or not in the opinion paragraph.

Qualified Audit Report:

The qualified Audit report is the reported issue by auditors to the financial statements that found material misstatements. But those material misstatements are not pervasive.

Adverse Audit Report:

An adverse Audit Report is a type of audit report issued to the financial statements when auditors found material misstatements in the financial statements.

Disclaimer Audit Report:

The disclaimer audit report is the report that issues the financial statements where there is matter to auditor’s independence and those mater cause auditors not be able to obtain sufficient audit evidence to support their opinion.

This has happened when auditors are prevented to access to certain information related to items or accounts in financial statements while those items or accounts are believed to be materially misstated and pervasive.

Auditors might not issue the disclaimer opinion if the restrictions are made only the items or accounts that material misstated but not pervasive.

Advantages of Audit Reports:

Prove management integrity on their shareholders. As an auditor is independent of management, the report could prove whether managements are honest to their shareholders or not. But, again, this is related to principle and agency theory.

Assure Financial Statements. Audit reports are issued by a professional and independent auditor who is operational independent from the entity’s management. The report issued from them could help the financial statement users to assure that financial information is correct.

It is the requirement of law and regulation. Most countries required the entities that have the specific criteria to have their financial statements audited by independent auditors those criteria like annual turnover, the value of assets, and the number of employees. The auditor is the evidence that could prove to the government that the entity complies with the law.

Parent company’s requirement. Many parent companies that have subsidiaries operating in other countries or even in the same country normally required their subsidiaries’ financial statements to be audited. This report could help them manage the subsidiary even more effectively.

It is the requirement of shareholders. Most of the corporate shareholders want their entity’s financial statements to be audited. This report is examined by the experts and express in the easy words that could be understood by most of the shareholders who do not have financial or audit background.

Help stakeholders to understand about entity’s financial and operational situation. This is probably the most important point. The auditor is required to state the auditor report whether the entity has any going concern problem or not. This includes financial and non-financial problems that could lead the entity to face bankruptcy in the next foreseeable period from the audit report date.

Limitation of Audit Reports:

Time too constraints for auditors. In practice, auditor normally faces time constraints which do not provide them enough time to perform their testing as they should be.

The scope of the audit might be limited by management. This is a popular discussion about audit’ issues. In the audit standard, auditors should have the full right to access information that could help them obtain audit evidence to express their opinion. However, in practice, management might try their best to prevent auditors from obtaining some sensitive information. These are probably the management don’t fully trust auditors ethic related to confidentiality or management themselves have integrity problems. These problems might prevent auditors from providing the best quality of audit opinion that it should be.

Auditors’ Independence. The code of ethics required auditors to stay independent from their audit clients. This is to ensure that auditors do not bias when they perform their works and issue audit opinion.

Auditors Qualification and Competency. This is also an important point. To run an audit firm, we all know that someone who represents the firm needs to hold a CPA qualification. But the thing is because of the competition, and because of the number of works, the quality of the audit report might have some problems. As you may know.

Risks that might not detect by auditors: Inherent Risks and Fraud Risks. The audit standard requires auditors to have proper audit planning as well as risk assessment. This ensures that the auditing quality is maintained and audit risks are identified and minimized. However, these things could not auditor eliminate all kinds of material misstatement risks from financial statements. For example, inherent risks and fraud risks.