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written by | September 20, 2022

Audit Report Definition, Types, Format, Tools, and Sample

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An audit is an independent examination of the financial information of a company, conducted with the objective to express an opinion. Auditing is conducted with a framework called Standard on Auditing (SA) prepared by The Institute of Chartered Accountants of India (ICAI) and notified by the Ministry of Corporate Affairs. SA ensures that audit reports prepared by the accountants are highly standardised, accepted, and understood.

Did you know? Only a Chartered Accountant in full-time practice covered within the definition of the Chartered Accountant Act, 1949 can be appointed as an auditor of a company. 

Also read: All About GST Accounting - Meaning, GST Journal Entry and Purchase

What is an Audit Report?

An audit report is prepared by an independent auditor. In the course of his examination of the books of accounts prepared in all material respects, he ensures the accounts are free from material misstatement whether due to fraud or error. However, an audit is not an investigation into the alleged wrongdoing in the company. Auditing is conducted to express an opinion on the financial condition of the company.

An audit is conducted to assure the stakeholders of the company that all the transactions recorded in the company’s accounting system throughout the year are truly reflected in the financial statements. Auditors are expected to have immense knowledge of accounting, finance, tax, and corporate laws that ensure the company is following a sound corporate governance structure.

 Audit Report Format

As per SA 700, while forming an opinion and reporting financial statements, an auditor is required to use specific headings, intended to assist in easier understanding of the report by the user.  

1. Title of the Report

The audit report format shall include a title that clearly indicates that it is a report of an independent auditor.

2. Addressee

The audit report shall be addressed based on the circumstances of the audit engagement. The audit report is usually addressed to the shareholders of the company. In the case of other forms of entity, it is usually addressed to the person who has appointed the auditor.

3. Auditor’s Opinion

One heading in the audit report shall include the auditor’s opinion. The opinion section of the audit report shall:

  1. Identify the entity’s name whose financial statements have been audited
  2. State that the financial statements that have been audited
  3. Identify the title of each statement consisting of the financial statements
  4. Refer to the notes, including the summary of significant accounting policies
  5. Specify the date or the period covered by each financial statement.

Further, the auditor could express four different opinions depending on the pervasiveness of the material misstatements. 

  • Misstatement is the difference between the amount, classification, presentation, or disclosure of a reported financial Statement and as required by Indian Accounting Standard (Ind AS).

For example, the company has calculated depreciation using straight-line method, but the laws, require the use of the written down method. Therefore, the difference in method used also leads difference in amount and is the misstatement.

  • A material misstatement is when it can influence the decisions of the users based on the analysis of the financial statement. 

For example, if company has given a loan to one of its directors, and the same has not been properly disclosed. Even if the loan amount is not much, the nature of the loan, ie, to the director is important. 

  • The term pervasive is used to describe the effect of misstatement on the financial Statement. Therefore, if the effect of the misstatement is widespread, affecting the whole of the financial statements, it is pervasive. Whether a misstatement is material or/and pervasive is a matter of an auditor's professional judgement. 
  • For example, when an auditor is not able to get sufficient audit evidence for various transactions, the financial statements would be materially misstated with pervasive effects.

Following are different types of auditor’s opinion are :

1. Qualified Opinion

The auditor issues a qualified opinion when there is a misstatement in the financial statement but usually related to a transaction or process. In most cases, the auditor is not sure about transaction or unable to confidently rely upon it and hence issue a qualified opinion.  

2. Adverse Opinion

The financial statements are materially misstated but it has a pervasive effect on the whole financial statement. These are sufficiently incorrect and it might impact upon economic decisions. It might also indicate possibilities of fraud.

3. Disclaimer of Opinion 

The auditor accepts the engagement of the audit but found that the financial statements are materially misstated and are pervasive. Also, the auditor in his professional judgment concludes that there are multiple uncertainties on the entity’s ability to continue the going concern. This also states that the auditor has not obtained sufficient and appropriate audit evidence to form an opinion thereon.

4. Clean Opinion

The auditor found that the financial statements in all material respects are prepared in accordance with the accounting standard. The auditor also states that appropriate disclosures have been made regarding any uncertainty and provisions and contingencies have been incorporated in the financial statements.

Also read: Different Types of Accounts in Accounting - 3 Types of Accounts

4. Basis for Opinion

The audit report shall include a section, directly following the opinion section, with the heading “Basis for Opinion”. And it will include the following things. 

  1. States that the audit was conducted in accordance with Standards on Auditing.
  2. Refers to the section of the auditor’s report that describes the auditor’s responsibilities under the SA.
  3. Includes a statement that the auditor is independent of the entity in accordance with the relevant ethical requirements relating to the audit and has fulfilled the auditor’s other ethical responsibilities.
  4. States whether the auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for the auditor’s opinion.

5. Going Concern

Going Concern is the fundamental accounting assumption wherein it is assumed that the entity will continue its operation and has no intention to limit its operation in the future. The auditor’s report shall express an opinion on the material uncertainty that poses a threat to the entity's ability to continue as a going concern.

6. Key Audit Matters

The auditor's report shall state the matters that are of most importance in the audit of financial statements as per the auditor’s professional judgment. These matters must be previously communicated with the management and the auditor should believe that they are important and improve the understandability of the financial statements.

7. Responsibility of Management for the Financial Statements

The audit report shall include a section with the heading “Responsibilities of Management for the Financial Statements”.

It is the responsibility of the management to prepare financial statements as conferred under Section 129 of The Companies Act, 2013. This section of the auditor’s report shall describe the management's responsibility for preparing the financial statements in accordance with Accounting Standards notified Under Section 133 of The Companies Act, 2013 by the Central Government on the recommendation of the National Financial Reporting Authority (NFRA).

It is also the responsibility of the management to design and implement a system of internal control for the preparation of financial statements to minimise the risk of material misstatement, due to fraud or error.

Under this heading, the auditor must recognize the responsibility of the management. This is to ensure that the user of the financial statements does not get the impression that the financial statements are prepared by the auditor. 

8. Auditor’s Responsibility

The objective of the auditor is to obtain assurance about whether the financial statements as a whole are free from material misstatements, whether due to fraud or error, and issue a report that includes the auditor’s opinion.

9. Other Reporting Responsibilities

There are several other reporting demands under various laws and regulations on which the auditor has to report, the major being The Companies Act, 2013. The auditor is expected to report these in a separate section in the audit report

10. Signature

The report of the auditor shall be signed by the auditor in his personal capacity. Where the firm has appointed the auditor, the report must be signed in the personal name of the auditor and as well as in the name of the audit firm. The partner signing the audit report also needs to mention the membership number assigned by the ICAI. They are also required to include the registration number of the firm as allotted by ICAI in the audit reports.

11. Place of Signature

The auditor’s report shall name a specific location, which is typically the city where the audit report is signed.

12. Date of Report

The report of the auditor shall be dated but no earlier than the date on which the auditor has obtained audit evidence and formed his opinion on the financial statements.

The date of the auditor’s report informs the user of the report that the auditor has considered the effect of events and transactions that took place up to that date as mentioned in the audit report.

Also read: What is the Difference Between Auditing and Accounting? - Learn Auditing and Accounting

Conclusion

So far, we have discussed a brief on the audit report. It is a very important document that serves the purpose of proper corporate governance in the company and acts as a legal evidence of financial soundness and order within the organization. The audit report has many utilities for the stakeholders of an entity. For instance, it safeguards the financial interest of the shareholders, acts as a moral check on any misconduct in the company, etc.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.

FAQs

Q: What does an adverse opinion in auditor’s report mean?

Ans:

An auditor issues an adverse opinion, when they not able to rely on the financial statements to give clean opinion. They may find material misstatements with a pervasive effect. It may indicate gross negligence or even fraud.

Q: What is the duty of the auditor in case of fraud?

Ans:

If the auditor in the case of normal examination of the books of accounts found instances of fraud, the auditor shall communicate this to the management and report it to the Ministry of Corporate Affairs (MCA) if the amount involved in the fraud exceeds 1 crore.

Q: Why is an audit not an investigation into alleged wrongdoing in the company?

Ans:

The auditor holds a statutory position in the company. They do not have the power of search and seizure, as required in case of investigation nor do they have training in finding frauds in the company.

Q: Who can be appointed as an auditor?

Ans:

As per Section 141 of The Companies Act, 2013, a person shall be eligible to be appointed as an auditor of a company only if they are a Chartered Accountant and in the case of a firm, where the majority of the partners practicing in India are Chartered Accountants.

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The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.