What is an Audit Report?
An audit report of a company is the auditors' formal opinion about the reliability of the organization's financial statements. The auditor can be either internal or an independent external one. He/she checks if the preparation of the company's financial reports follows the Generally Acceptable Accounting Principles (GAAP) or other reporting frameworks e.g. IFRS, UK, etc. The audit report assesses the financial statements' validity and credibility. Hence, it must be included in the company's financial report. The importance of an audit report is that it ensures that there are no material errors in an organization's financial statements. However, it must be always remembered that the report is merely an opinion and not an evaluation of any kind. This was the audit report definition in a nutshell.
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Contents of the Audit Report of a Company
Now since we know the importance of an audit report, let us move on to what an audit report of a company includes.
In the contents of the audit report, the auditor prepares the report on the financial statements and accounts of the company to the best of his knowledge and information. Later, he/she presents the annual report auditors report before the organization in the general meeting.
The Specimen of the Audit Report
During auditing, the auditor might be unable to collect any information. In this case, he has to include the details and nature of the missing information and also the effect of its absence in the report.
It is the solemn duty of the auditor to state if proper accounts, as mandated by law, have been kept by the company.
The auditor has to include all the reports audited by a person other than the company's auditor in his final report.
The auditor has to ensure that every director is eligible to be appointed as a director.
The annual report auditors report must contain the auditors' comments on financial transactions. The auditor must also include his observation on matters which might adversely affect the functioning of the company.
The auditor opines if the financial statements follow the existing auditing and accounting standards.
The auditor ensures that the profit loss account and the company's balance sheet mentioned in the report are according to the account books and returns.
Every deficiency, qualification, and reservation related to the account books must be included in the report.
Components of the Auditor's Report
Every audit report of a company follows a standard format, as mandated by the Generally Accepted Auditing Standards (GAAS). An audit report generally consists of three paragraphs.
The first paragraph mentions the duties and responsibilities of the directors and auditors.
The second paragraph mentions the scope. It states that the report was prepared following a set of standard practices.
Finally, the third paragraph contains the opinion of the auditor.
At times, a fourth paragraph is also present. Here, the result of another audit on another function of the entity is mentioned. However, the investor mainly focuses on the third paragraph, where the auditor's opinion is stated.
Audit Report Under Companies Act 2013
The Companies Act, 2013 requires that companies appoint an auditor. Besides, it also states the procedure of the appointment of an auditor. The Act lays down the various duties and responsibilities of the auditors. An audit report has a lot of value; hence proper steps must be taken in order to ensure that the audit is done without any error.
The Duties and Responsibilities of Auditors
Auditors can access the account books and vouchers of the auditee company anytime. It does not matter whether the said documents are at the registered office or anywhere else.
Auditors have the right to access the records of the subsidiary company. These records are essential for consolidation purposes.
Auditors have the right to be informed of a general meeting. He may attend it in person or through his authorized representative, who is also qualified to be an auditor.
An auditor has the right to receive information about such matters, which are necessary for performing his duties.
Q1. Differentiate Between Qualified Opinion and Adverse Opinion.
Ans: An auditor expresses a qualified opinion when he considers that the misstatements in the financial statements are both material and significant. He/she can also express a qualified opinion when he/she cannot find sufficient audit evidence to prepare the report.
An adverse opinion is issued when the auditor considers that the misstatements in the financial statements are either individually or as a whole, both material and pervasive to the company. An adverse opinion of the audit report of any company means that the report is unreliable and incorrect and does not give a fair view of the company’s financial position. Investors rarely accept such report. In most cases, they ask the company to fix the mistakes and get another report.
Q2. What are the Necessary Qualifications of an Auditor?
Answer: The necessary qualifications of an Auditor are as follows:
A person can be appointed as an auditor only if he has a college degree in the field of accounting.
It is better if the person is a qualified chartered accountant, thus giving more weightage.
A firm can appoint an auditor only when most of its partners are Chartered Accountants practising in India.
When a limited liability partnership firm is appointed as auditor, only the partners who are Chartered Accountants themselves are authorized to act and sign on behalf of the firm.
The auditor must be at least the age of 18 in order to qualify to become an auditor.
Q3. What Matters Should the Auditor Cover in His Report?
Ans: The auditor should cover the following matters in his annual report auditors report on the company’s financial statements:
Loans granted to parties
Internal control system
Cost records Maintenance
Statutory dues deposit
Accumulation of both Cash Losses and Losses
Default in repayment of dues
Guarantee for loans taken by others
Term loans application
Reporting of Fraud