Types of Audit Report
An audit report expresses an auditor’s opinion on a company’s financial performance and compliance with generally accepted accounting principles (GAAP). These principles set by the Financial Accounting Standings Board provide clarity on the auditing process so that auditors can make their opinions objectively.
The report summarizes the company’s assets and liabilities to ascertain whether it is free of material misstatement. From there, companies can identify areas to improve or determine what to look for in prospective investors.
While the document is prepared for the company, auditors may release the report to the public where any interested parties like investors can see it. It is from such reports that investors make the decision to invest in the company or not.
What Does an Auditor Do During an Audit?
Depending on the size of the company, an auditor can work alone or in a team of auditors to ensure the auditing process is exhaustive. The company’s management submits all the financial records available to the auditing team to get started.
The auditor reviews the company’s data collection and recording processes and checks them against GAAP’s reporting frameworks. The findings of this review will help the auditor to form objective opinions on the company’s financial status.
Companies that do annual audits gain a better standing with other companies and investors because of their transparency in financial reporting.
Types of Auditor Opinions
After reviewing the company’s financial reports, auditors write a letter expressing their opinion of its financial position. This opinion varies depending on the company’s compliance with the GAAP guidelines and the accuracy of the available financial information.
There are four different types of auditor reports. They include:
- Clean Report or Unqualified Opinion
- Qualified Report or Qualified Opinion
- Disclaimer Report or Disclaimer of Opinion
- Adverse Audit Report or Adverse Opinion
Let’s look at how each of them works.
1. Clean Report or Unqualified Opinion
A clean report means the auditors found no issues with the company’s financial reports, and the company is in full compliance with GAAP guidelines. It’s also referred to as an “unqualified audit opinion” example, because the auditors conclude the company does not need to adjust or correct anything to improve its financial status.
This kind of report shows the auditors are satisfied with the company’s financial performance. Therefore, once the report is released to the public, investors and other interested parties consider it positive news on the company.
2. Qualified Report or Qualified Opinion
If the company’s financial reporting does not comply with the GAAP guidelines, auditors may have no choice but to give a qualified opinion. It’s almost similar to an unqualified opinion except for the statement that shows the company is not compliant with GAAP.
It shows the different areas where the company can improve and the qualifications it must meet for standard financial reporting practices. Companies use qualified reports to identify areas that need fixing so they can improve their financial status.
Investors view a qualified opinion as a negative mark on the company and may refrain from investing in a company.
3. Disclaimer Report or Disclaimer of Opinion
The company must allow the auditors to access their financial records without any restraints for an effective auditing process. However, if the auditor feels the company limited their access or they could not get satisfactory answers to any of their questions during the audit, they may give a Disclaimer Report.
Basically, a disclaimer report distances the auditor from reporting on the company’s financial status as they cannot issue a definitive opinion. This could help to protect the auditor’s reputation in case the company faces a legal issue.
A disclaimer of opinion example would be where the auditor states the reason for their opinion as “inability to obtain sufficient and appropriate audit evidence as a basis of an audit opinion.”
4. Adverse Audit Report or Adverse Opinion
An adverse audit report shows the company is not compliant with any of GAAP’s guidelines for financial reporting and therefore portrays gross misstatements on their assets and liabilities. In this kind of audit report, the auditors discover instances of financial misappropriation and other irregularities, as well as inconsistent financial statements.
An adverse report highlights potential fraud in the company and alerts investors and other business entities to avoid it. On the other hand, the report offers the company an opportunity to improve its practices and address the underlying issues.
Structure of an Auditor Report
Most auditor reports carry the same structure even though they display different opinions. The template’s heading displays the dates, auditor’s name, the company, and the address. The body of the report is broken down into different segments as follows:
The auditor must state and explain their responsibility of auditing the company’s financial status as required by the law. They confirm they will do their best to provide results that are unbiased and free of personal influence.
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