BBA 7th Semester
AUDIT REPORT
Definition:
i. “Audit report is the expert opinion expressed by auditor as to the fairness of
financial statements”.
ii. “Audit report is final work of the audit that communicates the results of audit to
a third party attesting the accountability of the second party”.
Characteristics of Audit Report:
i. Final Stage:
Audit report is the final stage in the audit process. It is an end product of
every audit.
ii. Written Statement:
Audit report is a written statement of facts collected from the books and
accounting records.
iii. Means of Communication:
Audit report is the means by which the auditor formally communicates
the results of his audit work to the shareholders of the company.
iv. No Guarantee:
Audit report does not provide guarantee of the correctness of books of
account and financial statements examined by auditor. It is an expression
of auditor’s opinion on the financial statements of the organization.
v. Auditor’s Responsibility:
Under Section 255(3) of Companies Ordinance, 1984 the auditor is
responsible to make a report to the members of the company on the
books of account and financial statement.
vi. Valuable Document:
Auditor’s report is a valuable document in which the auditor gives his
independent opinion as regards the financial position of the company’s
business.
vii. Important Part:
Audit report is an important part of audit process. It summarizes the
results of the examination work conducted by the auditor.
viii. Addressee:
The audit report may be addressed to shareholders or board of directors.
But it is generally addressed to shareholders.
ix. Independent Opinion:
In audit report the auditor expresses his independent opinion regarding
the truth and fairness of books of accounts and financial statements.
x. Identification:
The audit report should identify the financial statements that have been
audited. The financial statements may include:
a) Profit or loss account or income statement
b) Balance sheet
c) Cash flow statement
d) Statement of changes in financial position
Basic Elements of Audit Report:
The basic elements of audit report are as follows:
i. Title:
An audit report must have an appropriate title such as:
“AUDIT REPORT FOR THE FINANCIAL YEAR . . . . . . “
The title helps the reader to identify the auditor’s report and to
distinguish it from other reports issued by the officials or board of
directors of the company.
ii. Addressee:
The auditor report should be properly addressed. The report may be
addressed to board of directors or shareholders of the company. The
report is generally addressed to the shareholders or members.
iii. Opening Paragraph:
The opening paragraph identifies the financial statements that have been
audited, the financial statements may include:
a) Profit and loss account
b) Balance sheet
c) Cash flow statement
d) Statement of changes in equity
The opening paragraph also includes the name of the company or entity.
iv. Scope Paragraph:
Scope paragraph of audit report should state that the audit was
conducted in accordance with auditing standards generally accepted.
The scope paragraph should describe the following facts:
a) A reference to the International Standards of Auditing (ISA).
b) The description of audit work.
c) Test basis and reasonable basis for opinion
d) Evaluation on the appropriateness of accounting principles used.
v. Opinion Paragraph:
This paragraph contains the auditor’s independent opinion about the
financial information examined by him and the operating results of the
undertaking.
vi. Auditor’s Signature:
The audit report must be signed in the name of auditor or audit firm. It
should bear the manual signature of the auditor.
vii. Auditor’s Address:
The address of the auditor should be stated in the audit report. The
complete address must be stated for information of the readers.
viii. Date of Audit Reports:
The audit report should be dated. The date of the audit report signifies
the date of completion of the audit work.
Types of Audit Opinion:
Audit opinion is the expression of positive or negative observations of an
auditor. The opinion expressed by auditor may be of the following types.
i. Unqualified Opinion (Clean Report):
This type of opinion indicates that the auditors are satisfied with the
company’s financial reporting. Unqualified opinion is given when the
financial statements are prepared as per financial reporting framework
and are free from material mistakes. When the auditor gives an
unqualified or open opinion, he has no reservations on the accounts and
financial statements of the organization. The clean or unqualified opinion
is expressed in a positive manner. It involves that the accounts and
financial statements present a true and fair view of business affairs.
ii. Qualified Opinion:
When the auditor expresses his opinion subject to certain observations or
qualifications (restrictions), it is called qualified opinion. Qualified opinion
is given when the financial statements are materially misstated but not
pervasive i.e. the financial statements show true and fair view subject to
certain reservations
Reason for Qualification Opinion:
The auditor may give qualified opinion under the following
circumstances:
a) When the auditor is unable to verify the existence and the values
of certain assets.
b) When the information and explanation necessary for the purpose
of audit are not furnished.
c) When the accounts do not disclose a true and fair view i.e.
financial statements are materially misstated.
d) When the proper books of accounts have not been kept in
accordance with law.
e) When the Balance Sheet and Profit and Loss Account are not in
Agreement with the books of account.
iii. Adverse Opinion or Negative Opinion:
When there is reasonable ground to form an opinion that the books of
accounts and financial statements taken as a whole do not present a true
and fair view of the financial position of the company, the auditor gives
adverse or negative opinion. It states that financial statements are not
free from material misstatements.
Reasons for Adverse Opinion:
The auditor may give the adverse opinion on the following grounds:
a) When preparation and presentation of financial information is full
of discrepancies and mistakes.
b) When financial information does not conform to accepted
principles of accountancy.
c) When auditor is satisfied that the financial statements prepared
by the management don not comply with the provision of the
relevant law.
d) When in his opinion there are sufficient evidences to form an
opinion that the financial information does not exhibit true and
fair view of the financial position.
iv. Disclaimer of Opinion:
When for want of sufficient information, the auditor is unable to form an
opinion on the fairness of financial statements, he may disclaim his
opinion. The auditor may state that he is unable to form an opinion on
fairness of financial statements for want of sufficient and appropriate
evidence to express an opinion.
Reasons for Disclaimer of Opinion:
The main reasons of disclaiming an opinion are given below:
a) The auditor may not get access to all the books of account and
other records.
b) There may exist material items, the value of which may be totally
uncertain because some of the records have been destroyed.
c) There may be limitations on the scope of audit work imposed by
certain circumstances that the overall financial information may
not be fairly presented.
