The financial statements shall be prepared in accordance with governing accounting standards or generally accepted accounting principles (GAAP).
The audit report plays an important role for the businesses like banks, creditors or other financial institutions would require the company’s financial statements before making a decision to lend money to the business.
Further, auditor’s opinion is of paramount importance to the shareholders to take their investment decision. Auditor’s opinion puts emphasis on the credibility of financial statements.
An audit report is, therefore, an official evaluation of an organization’s financial status, in combination with the opinion of the auditor and collected data on the company’s financial transactions and situation
Constituents of an Audit Report
It is important to know what audit report contains. The auditor examines the financial statement with his professional competence and expertise before signing it. The key elements in the audit report are as follows:
- A title was suggestive of the term “independent”. It means financial statements were audited with complete independence.
- Introductory paragraph covering the time and nature of audit
- Scope paragraph covering rules and methods adopted by the auditor.
- Opinion paragraph covering opinion of auditor on financial statements
- Auditor’s name
- Auditor’s signature
Importance of an Audit Report
The importance of audit report can be emphasized in the following points :
1) Getting detailed review:
When the auditors conclude their findings, the company would have a final report and it would give the stakeholders a clear picture of how the business is working.
The auditor report provides a thorough reference to all the inefficiencies in business in terms of financial transactions.
2) Receiving additional perspective
The auditor report provides the perspective on significant and even smaller aspects which need immediate attention by the management.
A good auditor provides explicit remarks on whether the business is conducting its affairs in full compliance or the severe flaws exist in the company.
3) Improving credit rating
When the business is growing and expanding rapidly, it is good for the banks and stakeholders to know every critical aspect of the business.
The business investors would see the success the company is enjoying and would like to make it trustworthy. That signature of auditors with an opinion on business compliance which is strong with internal control is the right thing to improve credit rating.
4) Evaluating internal controls
The auditor gains an appropriate understanding of internal control of the business as it relates to financial statement reporting. Internal control is the most important part of auditing and many organizations can find a significant amount of value from having an audit conducted.
During walkthroughs of internal controls and testing account balances, auditors gain an understanding of how the business works and can easily identify the critical points of internal controls. The auditor can opine on the strength and weaknesses of internal controls alongside financial reporting.
The auditor can help the staff of the business to spot efficiencies and improve inefficiencies in the flow of the business.