What is audit report?

The audit report is a document attached with the financial statement. In this report, external auditors state their opinion about the financial statement prepared by the audit client.

Mainly, it helps the user of financial statement to understand,

1. If the company’s financial statements are prepared in compliance with applicable frameworks like GAAP/IFRS.       
2. If the financial statement of the company contains material misstatement.

This report is issued by an external auditor based on business understanding, risk assessment, and collected audit evidence. The audit evidence is collected at the time of performing audit procedures. So, if collected audit evidence is sufficient and appropriate, the auditor issues a clean audit report. On the other hand, auditors need to modify the audit reports if collected audit evidence is not sufficient and appropriate.

Let’s discuss different aspects of an audit reports including purpose, quality, structure, and reporting mechanics.

Audit report purpose

Following are some of the objectives of the audit reports.

1. It helps to enhance the reliability of overall financial statement-related accounting record and implemented controls on financial reporting.
2. Different stakeholders of the company like creditors, banks, regulators, Government require audited report as part of their dealings with the company.
3. An audit report is one of the main requirements for company Law and Corporate Governance.
4. Auditors highlight key audit matters in their reports to the shareholders. Hence, user understanding increases about company business.

Audit report importance

The following factors make the audit report one of the most important business documents.

1. Agency relationship – management of the company is different from shareholders/owners. Hence, management might window dress or artificially inflate financial performance to fuel their own performance appraisal. Hence, an independent review by a professional accountant can be helpful to enhance the reliability factor.    
2. Verification by an independent professional accountant – Most shareholders do not understand technical and complex accounting concepts. Hence, an independent audit from professional accountants can be extremely helpful.
3.  Confident decision making – Signature and stamp of CPA firm increases the reliability of the financial statement. The users of financial statement come to know that statement and related accounting record has been reviewed/audited by independent, objective, and professionally qualified accountants. Hence, it increases their confidence in using financial statement and decision-making.

Audit report quality

Audit reports quality varies from firm to firm. Some audit companies have higher credibility in terms of their audit quality, technical competence, global acceptance, methodology, independence, audit processes and professional development.

Generally, an audit report’s quality depends on the following three components.

1. Quality commitment from top leadership – Top leadership plays an essential role in setting overall commitment for the quality. They are trendsetters and subordinates are highly expected to follow them. So, if they are committed to quality aspects, audit quality is expected to enhance. The strategic quality aspects include the appointment of appropriate audit professionals, implementation of internal quality control mechanism, and taking steps to keep a higher professional attitude.
2. Audit methodology – It’s about the adoption of methods and techniques to perform an audit. The audit starts from the business understanding and includes risk assessment, design of audit procedures, audit evidence collection, opinion formation, and conclusion reporting. For a good quality audit, it’s imperative to have extensive risk coverage through evidence collection.
3. Independence checks and risk reviews – At the time of entering the engagement, audit firms need to assess if they have sufficient resources, experience, and competence to form an opinion on the risk brought by the audit client.

Big five audit firms are well known for quality globally.

Audit reports structure

Generally, an audit reports is prepared on the following structure.

1. Title of the report – It helps understand the nature of the document. It’s named an independent audit reports.
2. Addressee– Usually, auditors mention to whom they want to address in the report. Generally, these addresses include shareholders and directors of the company.
3. Auditor responsibility – Auditors define their responsibility in terms of covering audit risk. Generally, they define their responsibility as forming audit opinions based on sufficient and appropriate audit evidence.
4. Management responsibility-The report defines that management is responsible for preparing financial statements on the basis of the applicable reporting framework.
5. Scope of audit performed-Auditors mentions how they’ve performed audit activities. Further, they mention the auditing framework used, the risk assessment model, and the basis of forming opinions.
6. Opinion of an auditor – These are conclusive remarks by auditors. They form their opinion on the basis of evidence collected. Auditors issue a clean audit report if collected audit evidence is sufficient and appropriate. On the other hand, auditors issue qualified audit reports if collected audit evidence is not sufficient and appropriate. Sometimes, they may also issue adverse opinion or disclaimer.

Conclusion

The audit report is signed by auditors and attached with the financial statement. The signature of auditors on the report depicts that auditors have verified the accuracy and completeness of financial statement.

So, attachment of audit report with financial statement leads to higher credibility for the users. The audit report is important as the company’s management is separate from shareholders/owners.

Audit quality is enhanced by the firm’s quality commitment, audit methodology, and independence checks. Likewise, audit reports structure contains title, addressee, auditor responsibility, management responsibility, the scope of audit procedures, and opinion.  

Frequently asked questions

Audit report meaning is?

An audit report means auditor’s signed document which is attached with the financial statement. It helps to increase financial statement credibility in the eyes of users.

So, the audit reports of a company is an important document.

To whom does the auditor has to report?

Auditor has to report to shareholders and directors of the company. They also mention that their report is for the shareholders and directors in the audit report. However, it’s use is not limited to them.

What are the types of audit reports?

Following are types of an audit reports.

1. Unmodified audit report.
2. Qualified audit report.
3. Adverse audit report.
4. Disclaimer of audit report.

Further read on ACCA global.