A qualified audit firm issues an audit report or an independent auditor report to express an opinion on the entity’s financial statements for the specific financial period on whether or not the company’s financial statements show the true and fair view following the accounting standards or GAAP, accounting policies, the required law and regulation (for certain industries like a financial institution or listed company).
The financial statements are normally prepared according to governing accounting standards or generally accepted accounting principles (GAAP), including IFRS, US GAAP, and local GAAP approved by the local regulator where the entities operate their business.
The audit or independent auditor report plays a very important role for businesses like banks, creditors, or other financial institutions requiring the company’s financial statements before deciding to lend money to the business.
Further, the auditor’s opinion is of paramount importance to the shareholders, investors, and potential investors to make their investment decision. Auditor’s opinion emphasizes the credibility of financial statements.
An audit report is, therefore, an official evaluation and important tool 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 the 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
- Those charged with governance responsibilities on the financial statements
- Management responsibilities on the financial statements
- Auditor’s name
- Auditor’s signature
Importance of an Audit Report
The importance of an audit report can be emphasized in the following points :
1) Getting a 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 financial transactions. It also provides information to the shareholders or the company owner about the integrity of management to the company and the shareholders.
The shareholders and investors could see all of these in the opinion section and the management letter. For example, if an auditor issues an unqualified opinion, that means there is no issue in the financial statements. However, if the auditor issues a qualified, adverse, or disclaimer opinion, then it is obvious that the financial statements are having issues.
Auditor normally issues a management letter to management, audit committee, and board of directors during the auditor of the company’s financial statements. This letter points out all of the issues that the auditor believes it is essential for management to change or improve and make the audit committee and the board of directors aware of and monitor the statute of the issue.
2) Receiving additional perspective
The auditor report provides the perspective on significant and even more minor aspects that 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 that 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 significant value from conducting an audit.
During walkthroughs of internal controls and testing account balances, auditors understand 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 business’s staff to spot efficiencies and improve inefficiencies in the flow of the business.