HOM EASSIGNMENT OF AUDITING

Q. Define audit report? What are the types of audit report?

Ans.
Definition:
The audit report is the report that contains the audit’s opinion which is
issued by independence auditors after their examination on
the entity’s financial statements and related reports.
Those including financial statements, management accounts,
Mostly, those reports are issued based on the result of auditors’
professional examination against the measurement criteria or
standards.
For example, auditors perform their audit on the client’s financial
statements against the accounting standard that used to prepare those
financial statements.
In other words, they review whether or not financial statements are
prepared true and fair view in accordance with the accounting
standards. Those standards could be IFRS, US GAAP or local GAAP.
After completing their testing, the auditor then issues the audit report
on the financial statements that they just audited. This report will also
include their opinion on the financial statements.
Using:
The audit report is used by many stakeholders including the entity’s
management, the board of directors, shareholders, investors,
government bodies, banks, and many others.
In most cases, the audit report is issued to cover financial statements
over 12 months or a year period.
Investors use audit reports and audited financial statements to assess
the entity’s financial performance and financial position for their
investment opportunity.
The government agency uses the audit reports and financial
statements to assess the completeness and accuracy of the tax
declaration.
Shareholders and the board of directors use the audit report to assess
the integrity of management and transparency of financial statements.
Noted:
Different types of audit report contain different audit’s opinions and
the main cause are from the different of misstatements found in the
financial statements. Different types of audit reports represent a
different level of assurance.
Here are the four types of report that we mentioned above,
Four Types of Audit Reports:
There are four types of audit reports issued by auditors on financial
statements. Each type of report contains different meanings and
messages from auditors to users of financial statements.
Those audit reports included the Unqualified Audit Report (Clean
Audit Report), Qualified Audit Report, Disclaimer Audit Report, and
Adverse Audit Report. The following are the detail of audit reports.
1 Unqualified Audit Report (Clean Audit Report):
Unqualified Audit Report issued by the auditor to financial statements
when auditors found no material misstatements after their testing.
This report contains an unqualified opinion from an independent
auditor.
The report showed that the entity financial statements are prepared
and present true and fair and complying with the accounting
framework being used.
This is a good sign for all kinds of stakeholders that willing to uses
the financial statements. You might find whether the audit report is
clean or not in the opinion paragraph.
Unqualified Audit report not only apparently shown to the
shareholders that financial statements are a true and fair presentation,
and free from all material misstatements.
But also imply that the management team has high integrity to the
shareholders.
However, before putting your truth on the audit report, make sure that
the auditor who issued the reports are from independence audit firms.
Big four audit firms are the firm that most of the shareholders put
their truth on.
2 Qualified Audit Report:
The qualified Audit report is the report that issue by auditors to
the financial statements that found material misstatements on them.
But those material misstatements are not pervasive.
For example, the opening balance of the entity contains a large
number of inventories that could not verify.
In this case, the auditor issue a qualified audit opinion on the qualified
audit report. However, if the auditor thinks that the misstatement is
pervasive, they will issue the adverse opinion in their report.
This kind of report, only inventories that mention are matters. Others
information in the financial statements is true and fair.
The term of seriousness, the qualified audit report is more serious
than unqualified due to material misstatements on the mention items
or accounts in the financial statements.
3 Adverse Audit Report:
Adverse Audit Report is a type of audit report issued to the financial
statements when auditors found that there are material misstatements
in the financial statements.
The misstatements found here are different from the material
misstatements found in qualified audit reports.
They are not only material misstated for themselves but also affect
others accounts and items in the whole financial statements. These are
called pervasive.
That means all the items and accounts in the whole financial
statements could not be trusted by shareholders, investors, and other
stakeholders.
In this report, auditors will list down the client name, financial
statements that they were audited and the period the financial
statements covered.
Auditor will also state all misstatements found and how they are
affected the financial statements and as well as the users of financial
statements.
In most cases, auditors also state all the material found the Others
Matters which is the message to the users of financial statements to be
aware of when they read the financial statements for their own
purpose.
4 Disclaimer Audit Report:
The disclaimer audit report is the report that issues the financial
statements where there is matter to auditor’s independence and those
mater cause auditors not be able to obtain sufficient audit evidence to
support their opinion.
This has happened when auditors are prevented to access to certain
information related to items or accounts in financial statements while
those items or accounts are believed to be materially misstated and
pervasive.
Auditors might not issue the disclaimer opinion if the restrictions are
made only the items or accounts that material misstated but not
pervasive.
Advantages of Audit Reports:
Provide assurance on Financial Statements. Audit reports issued by a
professional and independence auditor which is operational
independence from the management of the entity. The report issued
from them could help the users of the financial statement to assure
that financial information is correct or not.
Prove management integrity on their shareholders. As auditor is
independence from management, the report could prove whether
managements are honest to their shareholders or not. This is related to
principle and agency theory.
It is the requirement of law and regulation. Most of the countries
required the entities which have the specific criteria to have their
financial statements audited by independent auditors. Those criteria
like annual turnover, the value of assets, and the number of
employees. The auditor is the evidence that could prove to the
government that the entity is complying with the law.
It is the requirement of shareholders. Most of the corporate
shareholders want their entity’s financial statements to be audited.
This report is examined by the experts and express into the easy
words that could be understood by most of the shareholders who do
not have financial or audit background.
Parent company’s requirement. Many parent companies that have
subsidiaries operating in other countries or even in the same country
normally required their subsidiaries’ financial statements to be
audited. This report could help them manage the subsidiary even more
effectively.
Help stakeholders to understand about entity’s financial and
operational situation. This is probably the most important point. The
auditor is required to state the auditor report whether the entity has
any going concern problem or not. This includes financial and non-
financial problems that could lead the entity to face bankruptcy in the
next foreseeable period from the audit report date.
Limitation of Audit Reports:
The scope of the audit might be limited by management. This is a
popular discussion about audit’ issues. In the audit standard, auditors
should have the full right to access any kind of information that could
help them to obtain audit evidence to express their opinion. However,
in practice, management might try their best to prevent auditors to
obtain some sensitive information. These are probably the
management don’t fully trust auditors ethic related to confidentiality
or management themselves have integrity problems. These problems
might prevent auditors to provide the best quality of audit opinion that
it should be.
Time too constraints for auditors. In practice, auditor normally faces
time constraints which do not provide them enough time to perform
their testing as they should be.
Auditors’ Independence. The code of ethics required auditors to stay
independence from their audit clients. This is to make sure that
auditors do not bias when they perform their works as well as when
they issue audit opinion.
Risks that might not detect by auditors: Inherent Risks and Fraud
Risks. Audit standard requires auditors to have proper audit planning
as well as risks assessment. This is to make sure that the auditing
quality is maintained, and audit risks are identified and minimize.
However, these things could not auditor to eliminate all kind of risks
of material misstatement from financial statements. For example,
inherent risks and fraud risks.
Auditors Qualification and Competency. This is also an important
point. We all know that in order to run an audit firm, someone who
represents the firm needs to hold CPA qualification. But the thing is
because of the competition, and because of the number of works, the
quality of the audit report might have some problems. As you may
know
Conclusion:
As listed above, there are four types of audit reports and those reports
are different because of the nature of material misstatements found by
auditors.
Different types of audit reports contain different audit opinions. The
unqualified report issued for the financial statements that contain no
material misstatement.
Qualified reports on the others hand issued to the financial statements
that contain material misstatement yet those misstatements are only
for themselves.
The auditor will issue an adverse opinion when the financial
statement contains pervasive misstatement. Yet, they will disclaim not
to express their opinion if they could not have enough to review
financial statements.