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:
- 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.
- A qualified opinion, if there were any scope limitations that were imposed upon the auditor’s work.
- An adverse opinion, if the financial statements were materially misstated.
- 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.
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.
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.
CLEAN AUDIT REPORT OR UNQUALIFIED REPORT: If the auditor is satisfied that the accounts and balance sheet and profit & loss accounts do present a true and fair picture as per accounting principles and statutory requirements, he will give an unqualified or clean opinion.
Thus, if the auditor makes a statement in his report that “in our opinion and to the best of our information and according to the explanations given to us, the balance sheet and profit and loss account give a true and fair view of the state of affairs and the results of operations”, he will be said to have given an unqualified opinion and his report will be known as unqualified or clean report.
QUALIFIED REPORTS: Whenever the auditor of a company is not satisfied with any information or explanation given to him or if he thinks that the profit and loss account and the balance sheet do not exhibit a true and fair view of the state of affairs of the company or if the accounts presented by the directors call for further clarification, he must ask the directors to do so. He must mention that fact in his report. This type of report is known as qualified report as distinct from a clean report.
Before the auditor gives a qualified report, he should discuss the points with the directors. They may give such information in light of which it may be found unnecessary to qualify the report. It should be specified and to the point. A qualified report may be in respect of the following matters and the auditors should use appropriate words:-
- The stock in trade has been valued at the market price which has been more than the cost price.
- If there is any contingent liability the extent of which has not been given.
- Inadequate provisions for depreciation has been made.
Keeping the above in view we must consider the following also:
An Auditor is a Watchdog and Not a Bloodhound
- An auditor is not bound to be a detective or
- To approach his work with suspicion or
- With the foregone conclusion that there is something wrong.
He is a watch dog not a bloodhound. He is justified in believing the tried servants of the company and is entitled to rely upon their representation provided he take reasonable care.
An auditor is not an insurer. He does not guarantee that the books do correctly show the true position of the company’s affair.
The Auditor is to give information, not means of information: The auditor is required to make a report to the members of the company:-
- On the accounts examined by him
- On every balance sheet and profit and loss account which are laid before the company in general meeting during his tenure of office
- On every document declared to be a part of or annexed to the balance sheet and profit and loss account.
The auditor’s report must state whether in his opinion and to the best of his information, and according to the explanations given to him, the said accounts give the information required by this act in the manner so required, and give a true and fair view:
- In the case of the balance sheet, of the state of the company’s affairs as at the end of the financial year and
- In the case of the profit and loss account, of the profit or loss for the financial year.
If the report is not clean, it is qualified and the auditor expresses qualified opinion, then he is supposed to give the source of information otherwise not.
This is also known as a clean report and is considered to be the most common type of audit report. In this report, an auditor assigned in an audit simply states that a company’s financial statements that have been audited are fairly and correctly presented on their records. It is also stated there that important facts are not hidden and it complies with the accounting standards.
This is a report that shows an auditor’s assumptions that your business has followed conformity with accepted accounting principles and legal requirements. However, this report does not reveal anything about your business is in good standing economically. The unqualified report only states that your financial statements are correct and do not have any important details hidden.
This is a kind of report that states that a company’s financial records are fairly presented aside from certain area/s. It means that most things related to audit have been dealt with except for a few matters at hand. It is basically saying to anyone who needs to know that the company in question has accounting methods that do not follow the accounting standards.
An audit report can be unqualified if there is a limitation of scope in the work of an auditor. Aside from that, it is also possible that there is a disagreement between two parties (auditor and management).
However, it should be noted that having a qualified audit report is a sign that a business is deteriorating as it only means that a company’s financial statements are not found to be transparent.