Understanding an Audit Report

2. Understanding an Audit Report Understanding an Audit Report The sole purpose of conducting an external audit is to make sure that the financial statements of the company express a true and fair view of its state of affairs and profitability. Understanding an audit report is essential for users of financial statements as they tend to make economic decisions basedonit An independent auditor is appointed by the stakeholders so that he can carry out the audit in an unbiased manner. The auditor goes through vouchers, books, ledgers, registers, cash flow statements, balance sheets, profit and loss statements, etc. to express his opinion on the financial statements.

3. Why is Understanding an Audit Report Important? Why is Understanding an Audit Report Important? Benefits of Understanding an Audit Report Benefits of Understanding an Audit Report Consider you get access to the audited financials of the company. However, if you try to draw a conclusion purely based on audited financials, you will miss out on several things. You will not have access to the supporting documents and knowledge about the accounting policies and principles followed in the drafting of the financial statements. Even if you have access to everything, not everyone is skilled enough to have an auditor’s eye to draw conclusions and form an opinion.

4. Elements of an Audit Report Elements of an Audit Report Format of an Audit Report Format of an Audit Report The title of the audit report indicates that an independent auditor has prepared the audit report. It gives the assurance to the readers of an audit report that the auditor is unbiased in providinghis opinion on the financial statements. Addressee Addressee An auditor mentions in his audit report that for whom the audit report is prepared. Generally, the auditor addresses the audit report to the shareholders or the board of directors of the company. The addressee may change as per the law of the country, terms, andcircumstances of the engagement.

5. Auditor’s Opinion Auditor’s Opinion This is an essential part of an audit report and provides an overview of whether the company’s financial statements provide a true and fair view of its state of affairs and profitability. The readers trying to understandan auditreport mustpaydue attention tothis section.

6. The opinion section of the auditor’s report: The opinion section of the auditor’s report: Identifies the auditee and states that the financial statements have been audited Identifies the title of each statement forming part of the financial statements Refers to the notes on accounts and significant accounting policies Specifies the date or period of each statement forming part of the financial statements

7. There are four types of audit reports issued by an auditor: There are four types of audit reports issued by an auditor: 1. 1. Unqualified Opinion Unqualified Opinion The auditor expresses an unqualified opinion when he finds financial statements of the company true and fair, and there is no need for any modification. It is also called an unmodified or clear opinion. An unqualified opinion creates a positive sentiment in the mindsof stakeholders. 2. 2. Qualified Opinion Qualified Opinion The auditor gives away a qualified opinion when he concludes that he can not issue an unqualified opinion. Still, misstatements are not material enough to issue an adverse or disclaimer of opinion.

8. There Thereare arefour fourtypes typesof of audit auditreports reportsissued issuedby by an an auditor auditor: : 3. 3. Adverse Opinion Adverse Opinion The auditor expresses an adverse opinion when he finds significant misstatements in the company’s financial statements. In case if an external auditor provides an adverse opinion, it may even lead to the shutting down of the company or a change of management. If any fraud is detected, the auditor is obliged toreport thistogovernment authorities. 4. 4. Disclaimer of Opinion Disclaimer of Opinion The auditor expresses a Disclaimer of Opinion when the company doesn’t provide him all the required information. Because of this, he won’t be able to conclude, and thus, the exact picture of the company can’t be delivered.

9. Basis of Opinion Basis of Opinion 1. This section states that the audit was conducted according to the auditingstandards. 2. Refers to the section that describes auditor’s responsibilities under the Standardson Auditing 3. It includes a statement that conveys that the auditor is independent of the entity and fulfills the relevant ethical requirements. 4. The auditor also mentions whether he believes that the audit evidence obtained is sufficient andappropriate.

10. Basis of Opinion Basis of Opinion Going Concern Going Concern Here the auditor reports if the organization is a Going Concern as per the applicable Standardson Auditing. Key Audit Matters Key Audit Matters There is a complete set of key audit matters which auditors communicate in this section of the audit report. The auditor may require adding the key audit matters of entities besides the listed entities if the law or regulations requires. This section provides additional information to the ones interested in understanding an auditreport.

11. Basis of Opinion Basis of Opinion Responsibilities of Management for the Financial Responsibilities of Management for the Financial Statement Statement The management holds the responsibility for the preparation of the financial statements and presenting them to the auditor. Financial Statements should be free from errors and material misstatements. It is also the responsibility of the management to enforce internal controls and internal checks to achieve operational efficiencies. The external auditor clarifies this toaid in understanding an audit report.

12. Auditor’s Responsibilities as to the Audit of the Financial Auditor’s Responsibilities as to the Audit of the Financial Statement Statement 1. The auditor mentions the objective of conducting the audit. The two objects which are necessary includes: Obtaining reasonable assurance that the audited financials are free from material misstatements or not. Issuing the audit report, which contains the opinion of the auditor about the financial statement. • • 2. The auditor ensures that the assurance provided is of high level. Still, it is not the guarantee that allmaterial misstatements are detected. 3. It states that the misstatements can arise from fraud or error and provides a definition of the materiality as per the applicable financial reporting framework or describes that such misstatements are considered material if they are expected to influence the economic decisions of the users of the financial statements.

13. Auditor’s Responsibilities as to the Audit of the Financial Auditor’s Responsibilities as to the Audit of the Financial Statement Statement 4. Audit Report states that the auditor has exercised professional judgment and maintained the professional skepticism while conducting the audit and describes his responsibilities. 5. He mentions that he has obtained an understanding of audit relevant internal controls. It is necessary as the audit procedure is designed as per the internal control and circumstances. 6. Auditor also holds the responsibility to communicate to the management the scope and time required for the audit. He adds in the audit report about the significant deficiencies in the internal control found during the audit.

14. Auditor’s Responsibilities as to the Audit of the Financial Auditor’s Responsibilities as to the Audit of the Financial Statement Statement Other Reporting Responsibilities Other Reporting Responsibilities If the auditor addresses other responsibilities in addition to his responsibilities under Standards on Auditing, then such responsibilities he addresses in a separate section titled as ‘Report on Other Legal and Regulatory Requirements’ appropriate. or otherwise as Signature of the Auditor and Auditor’s Signature of the Auditor and Auditor’s Address Address The auditor signs the audit report in his name. He also signs the audit report in the name of the firm if an auditfirm is appointed.

15. Auditor’s Responsibilities as to the Audit of the Financial Auditor’s Responsibilities as to the Audit of the Financial Statement Statement Date of the Audit Report Date of the Audit Report The auditor puts a date on the audit report. It is the date when the auditor obtains sufficient and appropriate financial status evidence according to which he provides his opinion. The date of the audit report conveys that the auditor has taken into consideration all the effects of events and transactions that occurred on and before the date.

16. FAQs: Understanding an Audit FAQs: Understanding an Audit Report Report What are the minimal elements of an audit report? What are the minimal elements of an audit report? Thebasic elements of an audit report are asfollows: a) A title b) An addressee c) An opinion section d)Basisof opinion e) Goingconcern f) Key auditmatters g) A description of management’s responsibilities h) Adescription of auditor’s responsibilities

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