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UNIT IV

Auditor’s Report

Q1) What is an Audit Report?

A1) 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.

Q2) What are the contents of an audit report?

A2) 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. For example: Members
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. For example Modified Opinion, Unmodified Opinion
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. For example Report on Legal or Regulatory requirements
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.

Q3) Name the different types of Audit Report?

A3) Types of Report or Types of Auditors Opinion

There are primarily two kinds of opinions issued by an auditor in his / her audit report:

Unmodified Opinion/ Clean Report

Issued for any audit where the auditor is satisfied that the financial statements present a true and fair view of the operations and transactions in an enterprise during the period.

An audit report with an Unmodified Opinion is also known as a ‘Clean Report’. An Unmodified report develops confidence among users of Financial statements and annual reports of an enterprise.

It provides an impression that the financial statements are reasonably free from any misstatements and results as appearing there are true and fair.

Modified Opinion/ Qualified Report

Whenever the auditor has specific findings during his / her audit and concludes that an Unmodified Opinion cannot be issued due to the nature of findings, a Modified Opinion is issued in the audit report.

There are two basic reasons due to which an auditor concludes on issuing a Modified Opinion:

Based on the audit and evidence, finds out that the financial statements contain a certain degree of material misstatements.

Unable to obtain sufficient and appropriate evidences to conclude that the financial statements are free from material misstatements.

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

Q4) How many paragraphs are there in a typical audit report? What are the topics covered under them?

A4) The typical audit report contains three paragraphs, which cover the following topics:

The responsibilities of the auditor and the management of the entity.

The scope of the audit.

The auditor's opinion of the entity's financial statements.

Q5) When are the following report variations used?

i) Clean opinion

ii) Qualified opinion

iii) Adverse opinion

iv) Disclaimer of opinion

A5) i) A clean opinion, if the financial statements are a fair representation of an entity's financial position, being free of material misstatements. This is also known as an unqualified opinion

ii) A qualified opinion, if there were any scope limitations that were imposed upon the auditor's work.

iii) An adverse opinion, if the financial statements were materially misstated.

iv) A disclaimer of opinion, which can be triggered by several situations. For example, the auditor may not be independent, or there is a going concern issue with the auditee.

Q6) What is Unmodified Opinion or Clean Report?

A6) Unmodified Opinion/ Clean Report

Issued for any audit where the auditor is satisfied that the financial statements present a true and fair view of the operations and transactions in an enterprise during the period.

An audit report with an Unmodified Opinion is also known as a ‘Clean Report’. An Unmodified report develops confidence among users of Financial statements and annual reports of an enterprise.

It provides an impression that the financial statements are reasonably free from any misstatements and results as appearing there are true and fair.

Q7) What is modified opinion or qualified report?

A7) Modified Opinion/ Qualified Report

There are two basic reasons due to which an auditor concludes on issuing a Modified Opinion:

Based on the audit and evidence, finds out that the financial statements contain a certain degree of material misstatements.

Unable to obtain sufficient and appropriate evidences to conclude that the financial statements are free from material misstatements.

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

Q8) Give an example of a qualified opinion paragraph.

A8) 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.

Q9) Give an example of a draft disclaimer of opinion.

A9) 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.

Q10) Explain the emphasis of matter paragraph in an audit report.

A10) Emphasis of Matter paragraph in an Audit Report

In a situatissssssson 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:

To inform users of financial statements that the same has been prepared under a special purpose framework;

The auditor discovers some facts after the date of an audit report and the auditor issues new or amended audit report.

Uncertainty about the future outcome of an ongoing litigation.

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