AUDIT REPORT

Meaning of Audit Report

 It’s a statement of collected and considered facts,
so drawn up as to give clear & concise information
to persons who are not already in possession of full
facts of subject matter.
 An audit report is a written opinion of an auditor
regarding an entity's financial statements.
The report is written in a standard format, as
mandated by generally accepted auditing
standards (GAAS).
 NEED OF AUDIT REPORT
Shareholders need to frame their opinion.
 The auditor report is to addressed to the
shareholders of the company but it is also read by
other such as bankers, creditors, and other
parties who use the information in the financial
statements.
to avoid confusion to the readers, it is important
for the auditing profession to adopt conventional
and uniform wording in auditors report.
 OBJECTIVE OF AUDIT REPORT
The main objective of an independent
financial audit is the expression of an
opinion regarding the truthfulness and
fairness of presentation of financial
statements.
 Audit Report of a limited company:

Every auditor of a company shall perform various duties in regard

to reporting requirements as per companies act, 2013. these
are as:
1. Duty to report on true and fair view [Sec. 143(2)]
2. Duty to report on principal assertions [Sec. 143(3)]: the
auditor report shall also give the statement of facts and
opinion.
3. Duty to report on specific enquiries [Sec. 143(1)]
4. Duty to report reasons of negative answers [Sec. 143(4)]
5. Duty in case of Government Company [Sec. 143(5)]
6. Duty to sign audit report [Sec. 145]
 ELEMENTS OF AUDIT REPORT
Title
Addressee
Opening or introductory paragraph.
Management’s Responsibility for financial
statements.
Auditor’s Responsibility.
Auditor’s opinion
Date & place of the auditor’s report;
Auditor’s signature.
Reading & inspection of auditor’s report.
 Features of a Good Audit Report:
• Well written and Brief.
• Based upon reliable and factual information.
• Contain Constructive suggestions.
• Should be convincing and forceful.
• Should contain healthy criticism not be in
reprimanding tone.
 Types of Audit Report:
1. Unqualified or clean Report.
2. Qualified Report.
3. Audit Report with an ‘Emphasis of matter”
paragraph.
4. Adverse report.
5.Disclaimer of opinion report.
 1. Unqualified or clean Report.

An unqualified opinion is an audit report that

is issued when an auditor determines that
each of the financial records provided by
the business is free of any
misrepresentations.
 An auditor is satisfied as the fairness of
balance sheet and profit & loss account.
financial records have been maintained in
accordance with GAAP
 The auditor needs to satisfy on the
following issues:
• Statutory and material disclosures have been
made.
• Transactions recorded in the books have valid
support.
• Accounting principles and accounting standards
have been complied with consistency.
• No misstatements in FS.
• No prior period item is contained in the FS.
• No illegal transactions have been recorded.
 2. Qualified Report.

In situations when a company’s financial

records have not been maintained in
accordance with GAAP but no
misrepresentations are identified, an
auditor will issue a qualified opinion.
When he concludes on the basis of
sufficient evidence that misstatements are
material but not pervasive to FS.
• When he is unable to obtain sufficient and
appropriate evidence to conclude that FS
are free from material misstatements,
such misstatements remaining
undetected may be material but not
pervasive.
• The auditor has to give qualifications
made by him in the report.
• A qualified report is submitted on the basis of:
1. Qualified Opinion: auditor concludes that the
disagreement with mgmt. is not so material
that disclaimer of opinion or adverse opinion
is to be reported.
2. Adverse (Negative) Opinion: When he
concludes that on his examination he doesn’t
agree with the affirmations to be made.
3. Disclaimer of Opinion: where an auditor fails
to obtain sufficient information to warrant an
expression of opinion.
Qualification should be made in the following manner:
1. Auditor should quantify the effect of qualifications
individually and in aggregation on P&L A/C or B/S of the
company.
2. Qualification should be precise and clear.
3. Earlier period errors and frauds should not be
qualified.
4. Should use the words such as “subject to” or “except
that”.
5. Clarification given by the mgmt. should not be
included.
6. If personal exp. Of the directors are charged in the P&L
A/c should be qualified even of the amt. is not so
material.
7. When there was involvement of mgmt. in the fraud
 3. Audit Report with an
‘Emphasis of matter” paragraph.
Such reports relates to such matters which
may or may not be disclosed in financial
statements but are fundamental to user’s
understanding of financial statements.

These paragraphs do not change the nature

of the audit report.
EMPHASIS OF MATTER PARAGRAPH:
 It relates to the matter which has been
appropriately presented or disclosed in
FS and is fundamental to the user’s of
accounting.
 Its placed after opinion paragraph making
clear reference to the matter being
emphasized.
 Eg. Material changes in accounting policy,
application of new accounting standards
etc.
 Example:
• If there is uncertainty relating to a pending exceptional
litigation matter. This is highlighted in the auditor’s
report by an Emphasis of Matter paragraph.
After opinion para following shall be added:
Emphasis of Matter:
“we draw attention to note X to the FS which describes
the uncertainty related to the outcome of the law suit
filed against the company by XYZ Co. Our opinion is not
qualified in respect of this matter.”
OTHER MATTERS paragraph:
• It relates to the matter other than those
presented or disclosed in the FS but are
relevant to the users.
• Its placed after opinion paragraph & after
emphasis of matter paragraph.
• Eg. audit of consolidated financial
statement showing audit of subsidiary co.
 4. Adverse report.
This type of report is issued in following situations:-
 firm’s financial records do not conform to GAAP.
Misstatements are material as well as all pervasive.
 the financial records provided by the business have been
grossly misrepresented.
FS do not comply with the provisions of Co. Act.
FS – full of mistakes.
 When this type of report is issued, a company must correct its
financial statement and have it re-audited, as investors,
lenders.

All the material reasons for such report must be disclosed in the
report.
 5.Disclaimer of opinion report.
This type of report is issued in following
situations:-
 an auditor is not able to obtain sufficient
appropriate evidence to form basis of his
opinion.
This may occur for a variety of reasons,
such as an absence of appropriate financial
records cz of same being in custody of IT
deptt., police, excise or customs etc.
Difference between Audit Report and Audit
Certificate:
Audit Report:
• Independent opinion of the auditor regarding
FS.
• Based on examination of evidence and data.
• Opinion expressed in the report may differ
from one professional to other.
• Auditor must express his opinion with
reasonable skill and care.
 Audit Certificate:
• It is confirmation of the accuracy of the facts
stated in the FS.
• Not an estimate or opinion.
• Sort of guarantee of accuracy and correctness
of information contained in a statement or
document.
 Difference
Basis Audit report Audit Certificate

Meaning Expression of Written confirmation of

independent opinion accuracy of facts.

Nature Opinion on reliability of Gives guarantee of

the financial statements absolute accuracy and
prepared by the entity correctness of info.

Responsibility of the To render his opinion Responsible for

auditor with reasonable care absolute accuracy of
and skill facts stated therein.