What is an Audit Report?
Audit report is a report prepared by the auditor covering company’s assets & liabilities to show the current financial position of the company and its future. It covers all the financial aspects of a company. The audit report generally covers financial statements for a period of 12 months. An audit report is a very essential document and it is required by the law –
- If the company is publicly traded on stock exchange
- If the company lies under the industry regulated by the securities & exchange commission (SEC).
The audit reports are used by various individuals who are having interest in the organisation and it includes the following –
- Investors – Audit report are used by investors to identify the financial position of the company for investment purposes
- Shareholders & board of directors – Audit report are used by shareholders and board of directors in order to access the transparency of financial statements and management’s integrity.
- Bank – Banks use audit reports to know the liquidity position of the company and to know whether the company is having the capability to repay the loan back (In case loan is taken from a bank)
- Government – Government uses audit report to check the completeness and accurateness of the tax.
Types of Audit Reports
There are 4 types of audit reports prepared by auditors on the basis of financial statements and shared with the company. There are different meanings & messages related to each report. Let us discuss each report in detail below –
Unqualified Audit Report
Unqualified audit report is a report prepared by the auditor after determining that each & every financial record checked by him is free from misstatement or misrepresentation. This report shows that financial statements prepared and presented by the company are true, fair and in accordance with the accounting standards, rules & regulations. These reports are considered best for a business.
An unqualified report typically involves a title that includes the word “Independent”. Addition of this one word shows that the report is prepared by an unbiased third party. This report is made up of title, main body and three paragraphs. Main body of the report consists of audit purpose, auditor’s responsibilities and findings. After preparing the report, auditor signs the document, put a date along with the address. Make sure that the auditor who issued unqualified report should be from independent audit firm. Companies or shareholders mostly trust the big 4 audit firms.
Qualified Audit Report
Qualified audit report is a report prepared by the auditor after determining that there is no identification of misstatement or misrepresentation but company’s financial records are not maintained in accordance with the generally accepted accounting principles (GAAP). It is very similar to unqualified audit report. A qualified audit report includes an additional paragraph to provide the reason that why the audit report is not unqualified.
Adverse Opinion Report
This is the worst type of financial report issued to a business. Preparation of adverse opinion report by the auditors states that neither the company’s financial records are maintained in accordance with GAAP nor it is represented true & fair. It means it is grossly misrepresented. It might be possible that it is due to errors made by the company or an indication of fraud.
Auditor states all the misstatements or misrepresentations, how they effected the financial statements as well as the users of the financial statements. After issuing of such report by the auditor, company needs to correct its financial statements and get it re-audited as it will not be generally accepted by investors, lenders as well as other parties.
Disclosure of Opinion
This type of report is prepared by the auditor when the auditor unable to determine the financial status of a company due to absence of appropriate financial records or other reasons etc.
Advantages of Audit Report
- It shows you the accurate financial position of your company.
- Audit reports helps in proving management integrity to their shareholders – whether company is honest & true towards their shareholders or not.
- Many parent companies having subsidiaries in same or other countries want their subsidiaries financial statements to get audited. Hence, it helps in managing the subsidiary in a more effective way.
- Auditor report helps in identifying the financial & non-financial problems of a company which may save company from facing bankruptcy issue in future.
- It is an important legal requirement to get your accounts audited to provide information about annual turnover, value of assets, number of employees etc. to the government and auditor is like an evidence that can prove to the government that the particular entity is working properly and in accordance with the law.
- It is the requirement of shareholders. They want their company’s financial statements to be audited. Then, the same report is examined by the experts and expressed in such a way that it can be understood by most of the shareholders who do not have strong finance or audit background.
Limitations of Audit Report
- Time constraint is the first limitation of an audit report. Auditing of financial statements takes time and auditors are not having enough time to perform their testing.
- In order to run an audit firm, the person representing the firm should hold CPA qualification. There are some factors which may create some problems in the quality of report such as competition, number of works etc.
- The auditor has the full right to access any information of the company to obtain evidences and express their opinions whereas management tries their best to hide the sensitive information of the company in front of auditor. Therefore, auditors are not able to express their best opinion sometimes.
- At the time of auditing, auditing standard says that auditors need to do proper audit planning and risk assessment. Their main focus is on maintaining the quality of auditing, risk identification and risk minimization. Auditors cannot cover all types of risks and hence inherent risks and fraud risks might not detected by the auditors.
How Nomisma Cloud Bookkeeping Software helps in Preparing Audit Reports?
Nomisma cloud bookkeeping software is one of the best bookkeeping software’s for SMEs, Accountants, Sole Traders, Contractors, Agents, Self-Employed & Freelancers. With the help of this cloud bookkeeping software, you can easily view and generate audit reports not only period wise but also company wise. This cloud bookkeeping software provides you access to everything in a much easier way in comparison to other software’s. You will find everything online along with automatic updates and data backup. With the help of Nomisma cloud bookkeeping software, you can run your business from any part of the world.