Meaning and Types of Audit Report [Auditing Important Topics]

 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.

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:

The auditor's report is important for all those persons and parties who are concerned with the organization. It is especially important for the following:

(1) For Shareholders: Shareholders are the real owners of the company, but they do not directly take part in the management of the company. It is managed by a group of representatives selected by them. This group of representatives is known as Board of Directors. So, the shareholders do not have knowledge about the activities of the company.

They can get correct information about the working of the company from the auditor's report. He audits the accounts and gives his report about the completeness, correctness, accuracy and adherence to principles, etc. Thus, the audit report is an important document for the shareholders.

(2) For Directors: All the affairs of the company are managed by the directors. But in practice it is not so. They do not themselves do all the work. To a large extent they have to depend on their employees. They also want to know whether the employees are working sincerely and honestly. Such information can be provided to them by the auditor's report. Hence, the report is also important for the directors.

(3) For Creditors: The creditors of a company are always eager to know the real position of the company and whether their money is safe or not. They can get all such information from the auditor's report only.

(4) For Investors: It is human nature that the investor, while making an investment, wants safety for his money and also maximum income from his investment. The audit report creates confidence in the investors about the company. It is on the basis of the audit report that they decide to invest their money in the organization.

(5) For the Government: The government also relies on the audited accounts. So, it can take decisions about the affairs of the company on the basis of the report without any investigation.

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.

 

 Also Read: Auditing Important Topics