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Audit Report | Types of Audit Report | Specimen of Audit Report | Qualified Audit Report

 Audit Report
Meaning, Types of Audit Report and Specimen

Audit Report

Audit report is a statement on financial position of the company which is issued after the conclusion of audit. It is a medium through which an auditor expresses his opinion on the financial statements under audit.  It generally shows the nature and scope of audit conducted by the auditor and his opinion on the final accounts of the company. It is an important part of audit because it provides the results of the audit conducted by the auditor. The audit report is the final and ultimate report of audit process.

In the words of Lancaster, “A Report is a statement of collected & considered facts, so drawn up as to give clear and concise information to persons who are not already in possession of the full facts of the subject matter of the report.”

In short, the Audit Report is nothing but an expression of auditor’s opinion on the true & fair view on the financial statements of the company under audit.

Table of Contents

1. Meaning of Audit report

2. Importance of Audit report

3. Elements or Essentials of Good Audit report

4. Types of Audit report

a) Clean Report

b) Qualified Report

c) Adverse opinion

d) Disclaimer of Opinion

5. Difference between Clean and Qualified Audit report

6. Difference between Qualified report and adverse opinion

7. Audit Certificate & Difference between Audit report and Audit Certificate

8. Specimen of Various Types of Audit report

Also read: MCQs on Audit Report

Also read: Auditing MCQs (Multiple Choice Questions and Answers)

Importance of Audit Report       

In case of a company management is separated from the ownership share holders appoint the auditor to check the accounts and submit a report to them. However, the report doesn’t guarantee accuracy of the accounts. The auditor is neither a guarantor nor an insurer. The auditor is expected to act honestly with reasonable skill and care. Audit report is an extremely significant document as share holders rely upon it. Following are some of the importance of audit report:

1. Audit report indicates the true financial position of the company.

2. Audit report is assumed to be true and fair opinion of an auditor on the books of accounts maintained by the company.

3. Audit report is a reliable document on which difference users may base their decision.

4. An audit is an end product of complete audit process.

5. Audit report is also measures the responsibility of the auditor in regard to true and fair view of the financial statements of the company.

Elements of Audit Report or Essentials of Good Audit Report

1. Title: An auditor report must have appropriate title, such as "Auditor's Report". It is helpful for the reader to identify the auditor's report. It is easy to distinguish it from other reports. The management can issue any report about the business performance. The title o the report is essential. 

2. Addressee: The addressee may be shareholder or board of director of a company. The auditor can audit financial statements of any business unit as per agreement. The report should be appropriately addressed as required by engagement letter and legal requirements. The report is usually addresses to the shareholders or the board of directors. 

3. Date of Report: The report should be dated. It informs the reader that the auditor considered the effect on the financial statements and in his report of events or transactions about which he become aware the occurred up to that date.

4. Identification: The audit report should identify the financial statement that have audited. The financial statement may include trading profit and loss accounts, balance sheet and statement of changes in financial position and sources and application of frauds statement. The report should include the name of the entity. Moreover the data and period covered by the financial statement are also stated in it. 

5. Reference to Auditing Standards: The audit report should indicate the auditing standard or practice followed in conducting the audit. The international auditing guidelines need assurance that the audit has been conducted as per set standards. 

6. Opinion: The auditor's report should clearly state the auditor's opinion on the presentation in the financial statement of the entity's financial position and the result of its operations. The statement give a true and fair view is an auditor's opinion. This opinion is usually based on national standard or international accounting standards. 

7. Signature: The audit report should be signed in the name of the audit firm, the personal name of the auditor or both as appropriate. 

8. Auditor's Address: The address of auditor is stated in the audit report. The name of city is stated in the report for information of the readers. 

Types of Audit report:

There are four types of audit report which are given below:

a) Clean Report

b) Qualified Report

c) Adverse opinion

d) Disclaimer of Opinion

a)      Clean Report: It is also known as Unqualified Report. It is given by the auditor if he is satisfied with the fairness of Balance Sheet and Profit and Loss account with all the contents of the financial statements and he is satisfied with evidences, documents and explanation given by his clients.

b)      Qualified Audit Report: A qualified report means an audit report which is not clean. In case auditor has any reservation in respect of certain methods mentioned in the financial statements he may qualify his report. A qualified opinion shall be expressed as being subject of or except for the effects of the matter to which the qualification matters. If the accounting standards issued by Institute of Chartered Accounts of India is not followed by the company the auditor may qualify his report. The company Act doesn’t lay down any specific requirement regarding the manner in which the auditor should qualify his report. It should not lead any confusion to the reader. Before submitting a qualified report he should discuss the issued with that of the management. He should see that qualified report is free from ambiguity, vague statements etc.

From the above discussion, we find the following differences between clean report and qualified report:

Clean report

Qualified report

A clean report is given by the auditor if he is satisfied with the fairness of Balance Sheet and Profit and Loss account with all the contents of the financial statements.

1. A qualified report is given by the auditor if he is not satisfied with the fairness of balance sheet and profit and loss account.

2. In a clean report, an auditor will state something along with the lines,” In our opinion, the financial statements give a true and fair view of the financial position.”

2. In a qualified report, an auditor will state something along with the lines,” In our opinion, with the exceptions of some areas, the financial statements give a true and fair view of the financial position.”

3. There is no specific duty of management for clean report.

3. Management is bound to give explanation in respect of each qualification in the audit report.

Necessity of qualified audit report:

a) It ensures accountability of the management.

b) It helps in improving reliability of the financial statements.

c) It state that whether the company has maintained the proper books of accounts or not.

d) It helps in ensuring that whether or not financial statements give a true and fair view of the affairs of the company or not.

Circumstances for Qualification of Audit Report:

In following circumstances the auditor has to qualify his report.

(a) He cannot conduct audit satisfactorily due to non availability of certain books of accounts or records, information or explanations necessary for conduct of his audit.

(b) He finds that the Balance Sheet and Profit & loss Account have not been prepared in accordance with accepted accounting principles.

(c) He detects that provisions for Bad & Doubtful Debts, Depreciation etc. are not adequate.

(d) He detects that the company has created certain secret reserve.

(e) The stock in trade has been valued at market price which is more than cost price.

(f) He finds that the contingent liability for bills discounted has not been disclosed.

c)       Adverse Opinion: The worst type of financial report that can be issued to a business is an adverse opinion. This indicates that the firm’s financial records do not conform to GAAP. In addition, the financial records provided by the business have been grossly misrepresented.

Difference between Qualified report and adverse opinion/report:

Qualified report

Adverse opinion

1. A qualified report is given by the auditor if he is not satisfied with the fairness of balance sheet and profit and loss account.

1. An adverse opinion is given by the auditor when the firm’s financial records do not conform to GAAP and financial records are misrepresented.

2. In a qualified report, an auditor will state something along with the lines,” In our opinion, with the exceptions of some areas, the financial statements give a true and fair view of the financial position.”

2. The Auditor states that the Financial Statements do not present a true and fair view of the state of affairs and working results of the organisation.

3. The accounts present a true and fair view subject to certain reservations.

3. Adverse opinion is given when accounts presented does not give a true and fair.

4. A Qualification is made in the Audit Report when the Auditor has reservation on specific item(s) of material nature.

4. An Adverse Report is given when the Auditor has his reservations on the true and fair view presented by the Financial Statements.

d)      Disclaimer of Opinion: On some occasions, an auditor is unable to complete an accurate audit report. This may occur for a variety of reasons, such as an absence of appropriate financial records. When this happens, the auditor issues a disclaimer of opinion, stating that an opinion of the firm’s financial status could not be determined.

Audit certificate

Sometimes in addition to Audit report, the auditor is called upon to give a certificate for ant specific purpose. Such certificate is called audit certificate. It is not an expression of opinion of auditor on the books of account but it is simply a certificate on part of accounts for which certificate is required by the management. Auditor is directly responsible if anything is found wrong in the certificate given by him. Auditor should give the certificate on his letter head or on stationary carrying his name and address to avoid misunderstanding.

Difference between Audit Report and Audit Certificate:

Points

Audit Certificate

Audit Report

Meaning

It is a written confirmation of the accuracy of the information given in it.

It is a written statement of collected and considered information so as to give a clear picture of the state of affairs of the business.

Opinion

It does not contain any opinion. It confirms the accuracy of the figures with the books of accounts. Different auditors will give same certificate.

It is based on opinion of the auditor. Different auditors may give different opinion.

Basis

On the basis of data which can be measured.

On the basis of books of accounts and information obtained.

Guarantee

It guarantees the correctness of data in absolute terms and can be checked.

Does not guarantee the correctness of statement and data in absolute terms

Coverage

It does not cover all accounts but part of accounts for which certificate is required.

It covers all accounts of the concern.

Responsibility

Auditor is directly responsible if anything is found wrong in the certificate given by him.

Auditor does not guarantee the correctness of books of accounts hence he is not responsible if anything is found wrong in the books.

Suggestion

It is not suggestive in nature.

It is suggestive in nature.

Nature

It is fact oriented hence objective.

It is opinion oriented hence subjective

Format

Particular format is not required.

Format is required.

Specimen of Clear Report

 

To,

The Share Holders of ABC Ltd.

 

We have audited the attached Balance Sheet of ABC Ltd as on 31.03.2020 and also Profit and Loss account annexed there to for the year ended on that date.

1. We have obtained all the information and explanation which to the bet of our knowledge and belief were necessary for the purpose of audit.

2.Proper books of accounts are required by the law have been kept by the company so far as it appears from our examination of books and proper return adequate of our audit have been received from branches not visited by us.

3. The Balance Sheet and P&L account dealt with by his court are in agreement with the books of accounts and returns.

4. In our opinion and the to the best of our information and according to the explanation given to us the said Balance Sheet together with the notes thereon given the information required by the Companies Act of 2013 in manner so required and gives a true and fair view:

(a) In the case of Balance Sheet of the state of the company as at 31.03.2020; and

(b) In the case of the Profit and Loss Account of the profit of the company for the year ended on that date.

 

Date:                                                                                                                                                                     Signed

Place:                                                                                                            (Name, partner XY Associates)

                                                                                                                                           Charted Accountant.

 

 

Specimen of Qualified Report

To,

The Share Holders of ABC Ltd.

 

We have audited the attached Balance Sheet of ABC Ltd as on 31.03.2020 and also the P&L account of the company for the year ended on that date and report that:

1. We have obtained all information and explanation which to the best of our knowledge and belief were necessary for the purpose of our audit.

2. In our opinion proper books of accounts as required by law have been kept by the company so far as appears from our examination of the books subject to the comments given here under:

In the absence of stock register, adjustments relating to balances on the registers have been accepted on the basis of management decision.

3. The Balance Sheet and P&L account dealt with by the report are in agreement with the books of accounts and returns.

4. Subject to the qualification given below in our opinion and to the best of our information and according to the explanation given to us the accounts together with the notes there on and documents attached there to give the information required by the company’s Act of 2013 in the manner so required and give a true and fair view:

(a) In the case of Balance Sheet of the state of the company as at 31.03.2020; and

(b) In the case of the Profit and Loss Account of the profit of the company for the year ended on that date.

a. The provision for depreciation of fixed assets is inadequate.

b. Stock has been valued at market price which is higher than the cost price by Rs.________.

c. No provision for bad debt has been made for the doubtful debt in case of old bad debt.

d. The debentures agreements restrict the payment of future cash dividends to earnings after 31st March ____

Date:                                                                                                                                                        Signed

Place:                                                                                                                      (Name, partner XY Associates)

                                                                                                                                     Charted Accountant.

 

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