These include financial statements, management accounts, and management reports. Or other reports like compliant reports. Mostly, those reports are issued based on 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 used to prepare them.
In other words, they review whether or not financial statements are prepared true and fair view following the accounting standards. Those standards could be IFRS, US GAAP, or local GAAP.
The audit report is used by many stakeholders, including the entity’s management, 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 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.
Different audit reports contain different audit opinions, and the main cause is the different misstatements found in the financial statements. Therefore, different types of audit reports represent different levels of assurance.
Here are the four types of reports 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 the audit reports.
#1 Unqualified Audit Report (Clean Audit Report):
The auditor issued an unqualified audit report to financial statements when auditors found no material misstatements after their testing. Therefore, this report contains an unqualified opinion from an independent auditor.
The report showed that the entity’s financial statements are prepared and presented true and fair and comply with the accounting framework being used.
This is a good sign for all kinds of stakeholders that are willing to use the financial statements. You might find whether the audit report is clean or not in the opinion paragraph.
An unqualified Audit report apparently shows 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 toward the shareholders.
However, before putting your truth on the audit report, ensure that the auditor who issued the reports is from an independent audit firm. Big four audit firms are the firm that most of the shareholders put their truth on.
#2 Qualified Audit Report:
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 an adverse opinion in their report.
In this kind of report, only inventories mention the matter. Other financial 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 mentioned items or accounts in the financial statements.
#3 Adverse Audit Report:
The misstatements found here are different from the material misstatements found in qualified audit reports. They are materially misstated for themselves and 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, the financial statements that they were audited and the period the financial statements covered.
Auditors will also state all misstatements found and how they have affected the financial statements and their users.
In most cases, auditors also state all the material found in 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 a matter to the auditor’s independence and that matter cause auditors not to be able to obtain sufficient audit evidence to support their opinion.
This has happened when auditors are prevented to access 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 to the items or accounts that material misstated but not pervasive.
Advantages of Audit Reports:
- Assure of Financial Statements. Audit reports are issued by a professional and independent auditor who is operational and independent of the entity’s management. The report issued from them could help the financial statement users to assure that financial information is correct.
- Prove management integrity to their shareholders. As an auditor is independent of management, the report could prove whether managements are honest to their shareholders or not. But, again, this is related to principle and agency theory.
- It is the requirement of law and regulation. Most countries required entities that have 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 complies with the law.
- It is the requirement of shareholders. Most corporate shareholders want their entity’s financial statements to be audited. This report is examined by the experts and expressed in 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 in the auditor report whether the entity has any going concerns or 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 information that could help them obtain audit evidence to express their opinion. However, in practice, management might try their best to prevent auditors from obtaining some sensitive information. These are probably because the management doesn’t fully trust auditors’ ethics related to confidentiality or because management themselves have integrity problems. These problems might prevent auditors from providing the best quality audit opinion that they should.
- Time is too constrained for auditors. In practice, auditor normally faces time constraints that do not provide them with enough time to perform their testing as they should.
- Auditors’ Independence. The code of ethics required auditors to stay independent from their audit clients. This is to ensure that auditors do not bias when they perform their work and issue audit opinions.
- Risks that might not detect by auditors: Inherent Risks and Fraud Risks. The audit standard requires auditors to have proper audit planning as well as risk assessment. This ensures that the auditing quality is maintained and audit risks are identified and minimized. However, these things could not auditor eliminate all kinds of material misstatement risks from financial statements. For example, inherent risks and fraud risks.
- Auditors’ Qualification and Competency. This is also an important point. To run an audit firm, we all know that someone who represents the firm needs to hold a CPA qualification. But the thing 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
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 contains no material misstatements.
Qualified reports, on other hand, are issued to the financial statement containing material misstatements, yet those misstatements are only for themselves.
The auditor will issue an adverse opinion when the financial statement contains pervasive misstatements. Yet, they will disclaim not to express their opinion if they could not have enough to review financial statements.