An audit report is a report that contains the opinion of the auditor, which is issued by the independent auditors after their examination on the entity’s financial statements and related reports. Those including financial statements, management accounts, management reports, and other reports like a compliant report. The format of an audit report is fixed as per the generally accepted auditing standards. But a few changes are allowed to be made as per the requirement of the auditor which depends upon the audit work.
A typical audit report contains three paragraphs, which cover the below-mentioned topics –
- The responsibility of the auditor and the management of the entity
- The scope of the audit
- The auditor's opinion of the entity’s financial statements
Here are the different opinions provided by an auditor –
- Clean Opinion – An auditor gives an honest opinion, also known as unqualified opinion if according to him, the financial statements are accurate and fair and there is no material misstatement in them.
- Qualified Opinion – The qualified opinion is given if in the financial statements, there is no material misrepresentation but they are not prepared following the generally accepted accounting principles.
- Adverse Opinion – This is the worst type of audit report unfavourable opinion that auditor can give. Audit report opinions imitate that the financial statements of an organisation are materially misrepresented, misstated, and do not reflect its correct financial performance.
- Disclaimer of Opinion - In case the auditor fails to frame an opinion about the financial statements of the business, then he gives a disclaimer of opinion. The motive for the disclaimer can be the lack of audit indication or the restriction by the customer to examine all the records etc.
Content of the Report
The content of an audit report is mentioned as under –
- Title – The title should be an “Independent Auditor’s Report.”
- Addresses – It should be referred to whom the auditor’s report is handed over to
- Management Responsibility – A management responsibility towards the financial statement has to be written which comprises of the accountability of management towards the preparation and presentation of financial statements
- Auditor’s Responsibility – An auditor’s trust has to be written which provides for their obligation to issue an impartial opinion on the financial statements
- Opinion – Next, the auditor is needed to write his own audit report opinion on the truth and justice of the financial statements specifying the basis of such opinion
- Basis of Opinion – Based on the fact of the audit report opinion is to be stated
- Other Reporting Responsibility – After the points mentioned above, if any other reporting responsibilities exists then the same must be said in the report
- Signature – A signature is to be done by the engagement partner of the audit company, and below that, the name of the engagement partner and the audit company must be written
- Place and Date – Finally, the place of signature and date of signature must be mentioned
Advantages of an Audit Report
- Assures financial statements
- Prove management integrity on the stakeholders
- It is a requirement of law and regulation
- Help the shareholders to understand the entity’s financial and operational situation
Disadvantages of an Audit Report
- A few times the management does not provide the auditor full access to the audit evidence
- It is required that the auditor should be independent of their customer
- Time restraint is again an issue faced by the auditor
- The auditor’s report is a document containing the auditor’s opinion of whether the firm’s financial statements comply with the GAAP
- The audit report is necessary because creditors, banks, and regulators require an audit of a firm’s financial statements
- A clean audit report means a company followed accounting standards while an unqualified report says there might be errors
- An adverse report implies that the financial statements might have had discrepancies, misrepresentations, and didn't adhere to GAAP
For the businesses, it is compulsory to get their financial accounts audited. As mentioned above, the auditor after performing audit processes issues an audit report which can be one out of the four kinds of audit report opinions depending upon the nature of material misstatement or misrepresentation detected by the auditor and if no distortion is detected then the auditor issues a clean report.