UNIT IV
Auditor’s Report
Auditor’s Report
An audit report is a written opinion of an auditor 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. The following report variations may be used:
The typical audit report contains three paragraphs, which cover the following topics:
An audit report is issued to the user of an entity's financial statements. The user may rely upon the report as evidence that a knowledgeable third party has investigated and rendered an opinion on the financial statements. An audit report that contains a clean opinion is required by many lenders before they will loan funds to a business. It is also necessary for a publicly-held entity to attach the relevant audit report to its financial statements before filing them with the Securities and Exchange Commission.
Contents of an Audit Report
The basic structure of an audit report as prescribed by the Standards on Auditing is as follows:
Heading | Brief of contents |
Title | Title should mention that it is an ‘Independent Auditor’s Report’. |
Addressee | Should mention clearly as to whom the report is being given to. |
Management’s Responsibility for Financial Statements | Mention that it is the Management’s responsibility to Prepare the Financial Statements of the company, Board of Directors |
Auditor’s Responsibility | Mention that responsibility of the Auditor is to express an unbiased opinion on the financial statements and issue an audit report. |
Opinion | Should mention the overall impression obtained from the audit of financial statements. |
Basis of the Opinion | State the basis on which the opinion as reported has been achieved. Facts of the basis should be mentioned. |
Other Reporting Responsibility | If any other reporting responsibility exists, the same should be mentioned. |
Signature of the Auditor | The engagement partner (auditor) shall sign the audit report. |
Place of Signature | The city in which audit report is signed. |
Date of Audit Report | Date on which the audit report is signed. |
Other headings being basic and self-explanatory in nature, we need to understand the about the opinion part precisely. This part forms the basic crux of an audit report.
Opinion in an Audit Report
Types of Report or Types of Auditors Opinion
There are primarily two kinds of opinions issued by an auditor in his / her audit report:
a) Based on the audit and evidence, finds out that the financial statements contain a certain degree of material misstatements.
b) Unable to obtain sufficient and appropriate evidences to conclude that the financial statements are free from material misstatements.
c) There are three kinds of modified opinions which are issued according to the findings and circumstances:
A. Qualified Opinion
B. Adverse Opinion
C. Disclaimer of Opinion
A. Qualified Opinion
A Qualified Opinion is given in a situation where:
The auditor concludes that misstatements are material but the impact is not so high that it would render the whole financial statements unacceptable; or
The auditor is unable to obtain sufficient or appropriate audit evidence but concludes that there are indications of misstatements in the financial statements (but the degree is not high).
Example of a Qualified Opinion paragraph in audit report:
In our opinion, except for the incomplete disclosure of the information referred to in the Basis for Qualified Opinion paragraph, the financial statements give the information required by the Companies Act, 2013, in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India:
In case of the Balance Sheet, of the state of affairs of the company as at March 31, XXXX;
In case of Profit and Loss Account, of the profit/loss for the year ended on that date; and
In case of the Cash Flow Statement, of the cash flows for the year ended on that date.
B. Adverse Opinion
An Adverse opinion shall be issued by the auditor where he concludes that on the basis of evidence obtained and procedures performed, there are material misstatements in the financial statements and the impact of the same is high.
C. Disclaimer of Opinion
A Disclaimer of Opinion is to be issued by an auditor in cases where the auditor concludes that he / she is not able to obtain sufficient and appropriate evidences. In such scenario, the auditor is not able to form an opinion and thus, disclaims form providing an opinion on the financial statements. The impact of material misstatements and degree of the same is high enough.
Example of a Draft Disclaimer of Opinion:
We were engaged to audit the financial statements of ABC Private Limited (“the entity”) which comprises the Balance Sheet as at March 31, XXXX, the statement of Profit and Loss, (the statement of changes in equity) and statement of Cash Flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.
We do not express an opinion on the accompanying financial statements of the entity. Because of the significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we have not been able to obtain sufficient and appropriate audit evidence to provide a basis for an audit opinion on these financial statements.
Emphasis of Matter paragraph in an Audit Report
In a situation where the auditor concludes that it is important to draw the attention of users of the financial statement to a particular reported item, he/she may include an Emphasis of Matter paragraph in his / her audit report. In this case, the auditor is not required to modify his / her opinion. The paragraph is added when the issue is not a key audit matter and only requires disclosure for a better understanding of the financial statements.
Example of circumstances where the auditor shall include Emphasis of Matter paragraph in audit report:
a) To inform users of financial statements that the same has been prepared under a special purpose framework;
b) The auditor discovers some facts after the date of an audit report and the auditor issues new or amended audit report.
c) Uncertainty about the future outcome of an ongoing litigation.
Key Takeaways:
References:
