The Importance of Audit Report and its Purpose
In this blog, we have discussed the importance of an audit report and the purpose it serves.
An audit report is the end product of any audit process. Once an audit is carried out, the audit findings are to be communicated to the appropriate authority e.g., shareholders in the case of a company. This is done in the form of a formal audit report. The report contains the opinion of the auditor as to whether the financial statements reflect a true and fair view of the financial position and operating results of the enterprise.
What is the main purpose of an auditor’s report?
Audit reports are accorded great importance.
The main purpose of an audit report is to provide reasonable assurance that the financial statements of a company are free from fraud and errors.
If the auditor is not satisfied with the genuineness of transactions or has a reservation about a particular matter, he should clearly mention that in his report.
Thus, this information helps all stakeholders and users of financial information to develop confidence in the concerned company.
Importance of Audit Report
The importance of an audit report can be judged from the following points:
1. The end product of auditing
As stated previously, an audit report is the final outcome of the auditing process.
When financial statements are finalized, they must usually include an evaluation i.e., an auditor’s report from a qualified accountant or auditor. This report gives an overview of the evaluation of the correctness and reliability of the financial statements of a company.
Along with the balance sheet, profit and loss statement, and director’s report, the auditor’s report also forms part of the statutory accounts of a company.
Also, law via Section 143(2), (3), & (4) of the Companies Act, 2013 mandates that an audit report duly signed by the auditor must be furnished & laid down before the members at the annual general meeting of the company.
2. Auditor’s opinion on accounts
The audit report expresses the auditor’s opinion on the company’s accounts and records as examined by him.
The auditor analyses the financial statements and determines if they are prepared in conformity with appropriate financial reporting standards or principles applicable to the company under audit. Before preparing the audit report, he seeks to assess whether the financial statements comply with the applicable statutory requirements.
3. Reflection of auditor’s work
The work done by the auditor is reflected in the audit report. It showcases the nature and extent of audit procedures adopted by the auditor to carry out the examination of accounts.
4. Measures auditor’s responsibility
The audit report is the instrument that measures the auditor’s responsibility with regard to the assessment of financial statements.
If any critical information is purposely withheld from the auditor in the ordinary course of the audit, and he had no way of knowing the existence of such information, in that case, the auditor should not be considered guilty or negligent if the accounts turn out to be incorrect as a result.
If, on the other hand, the auditor had knowledge of the existence of such important information but chose to ignore it, he would be held responsible.
5. Used as a reliable source of evidence
The audit report reveals the true state of the company’s financial situation. It is recognized as a reliable document by a variety of people. It assists the users of financial statements in determining whether or not the financial information is correct.
Filing of Income Tax Return: The majority of the time, income tax authorities accept the profit and loss statement that has been prepared and certified by a qualified auditor and they do not go into the details of the accounts.
Borrowing of money from external sources: Based on an audited balance sheet, money can be borrowed from external sources with ease. The majority of financial institutions approve various loans on the basis of audited financial statements and accompanying audit reports.
Statement of Insurance Claim: In the event of a flood, fire, other natural calamities, or similar unexpected incidents, the insurance company may settle the claim for loss or damages based on the audit reports of the previous year.
Sales tax payments: The audited books of account may generally be accepted by the GST & sales tax authorities.
Bankruptcy cases: The audited accounts serve as a basis to determine action in insolvency and bankruptcy cases.
6. Advice to the management
Internal auditors offer advice to management on business & operational areas that require improvement. They evaluate a company’s internal controls, including its corporate governance and accounting processes.
In the case of external audits, it is possible that management may consult the auditor and seek advice on some technical issues, even though it is not the external auditor’s duty to provide advice. His work is primarily concerned with the legality and validity of the transactions of the business. Nevertheless, he should bring the shortcomings of the internal control system to the notice of the management. Because if deficiencies are found in the internal control system, then it affects the nature and scope of audit procedures.
Conclusion
The tasks of an auditor are extremely important to everyone concerned with the company. Therefore, it is important that the auditor must write his audit report in an unbiased and effective manner based on facts and actual statistics.
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