What are the Characteristics of a Good Audit Report?
Characteristics of a Good Audit Report:
The process of accounting is regarded as incomplete unless the books of account and financial statements are independently verified and examined. The responsibility of doing such verification and examination is with the auditors who conduct an audit and submit their report. Thus, an audit assignment starts with the appointment of auditors and ends when the auditors submit their final report to the company.
In this blog, we have discussed the essential characteristics that a good audit report should possess and the reporting responsibility of auditors.
What is an audit report?
An audit report is the ultimate product of every audit. It is nothing but a statement that combines all the observations made by an auditor while reviewing a company’s financial statements.
Through the medium of an audit report, an auditor accumulates the results of his audit and conveys his opinion on the financial statements of the client. Thus, it’s an indispensable part of audit without which the auditing process can’t complete.
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.
Basic elements of an auditor’s report
An auditor’s report generally includes the following elements:
- A title
- An addressee (addressed to the shareholders of the company at large or appointing authority, say Board of directors)
- An introductory paragraph that identifies the financial statements which have been audited
- A statement specifying the responsibility of management for the preparation of the financial statements
- A description stating that the auditor’s responsibility is to express an opinion on the financial statements and also throwing light on the scope of the audit
- An opinion paragraph containing an expression of opinion on the financial statements (a reference is also made to the applicable financial reporting framework used to prepare the financial statements and whether the company has followed it or not)
- The auditor’s signature
- The date of the auditor’s report
- The place of signature
What are the Characteristics of a Good Audit Report?
A good auditor’s report should generally have the following characteristics:
1. Factual information:
The audit opinion should be based on an objective examination of the facts.
2. Effective presentation:
The report should be presented in an effective manner so that it enhances readability. As far as possible, it should be divided into separate paragraphs.
3. Independent and unbiased approach:
The auditor’s report should demonstrate an impartial attitude. It should be guided by an objective, independent and unbiased judgment. The report must not be influenced by any financial interest of the auditor in the company or its management. This is one of the most essential characteristics of a good audit report.
4. Honest identification of weaknesses in control:
The auditor should state his understanding of the internal control system of the entity and the degree of reliance placed on the system during the course of the audit. He should mention that he has reviewed the internal controls from time to time so as to ascertain their adequacy.
5. Clear expression of opinion:
The auditor’s report must include a clear written opinion on the financial information. A clean report signifies the satisfaction of the auditor in all respects and where a qualified, adverse, or disclaimer of opinion is to be given or a reservation of opinion on any matter is to be made, then the auditor must state the reasons thereof.
6. Precise, brief and relevant:
The report should be drawn in a brief manner. It must be brief but no fact should be left out.
7. Easy language:
In addition, the report should be in a simple language so that it can be understood easily. The report must be clear and comprehensive. Notes, if any, must be included with the report.
Needless to mention, an audit report has to specify the date on which it is drawn up. This should be the date of completion of the audit and in no case, should be earlier than the date on which the auditor has gathered sufficient and appropriate audit evidence to be able to support his opinion.
9. Addressed properly:
An audit report is addressed to the company’s members and is considered at the AGM of the company. It should be appropriately addressed as required by the engagement letter and legal requirements. Mostly, it is addressed to the appointing authority of the auditor. In the case of statutory audit, it is addressed to the shareholders, and in the case of internal Audit to the Board.
The audit report has to be signed by the auditor in his personal name. In the case where a firm is appointed as the company’s auditor, the report should be signed in the personal name of the auditor as well as in the name of the firm. The partner/proprietor signing it must mention his ICAI Membership Number.
Reporting responsibility of auditors
The following are the primary duties and responsibilities of the auditors in relation to the report:
- To protect and preserve the interests of shareholders against the misuse of directors’ powers in managing the assets of the entity.
- To undertake a proper inspection of accounts in order to ensure that the transactions of the entity are legal and regular. The goal is to inform shareholders about the true financial position of the entity.
- To disclose in their report any such activity of the management that might prove to be prejudicial to the interests of the shareholders who have contributed capital to the company.
- To check whether the accounts have been prepared and presented in conformity with the best principles and standards of accounting. If there are any deviations from those principles, the auditors should bring them to the attention of both directors and shareholders.
Thus, an auditor’s report is a valuable aid to the shareholders.
It is the duty of every auditor that he or she, through the issue of an audit report, conveys adequate information to the shareholders on the financial position of the company. That is why auditors are also considered to be the agents of shareholders for whom their report is primarily meant.
It is important to note here that in the course of reporting, the technical competence, professional integrity, and independence of the auditors determine how they arrive at their opinion or belief and how they carry out their tasks.
In nutshell, an auditor’s report should include an honest expression of opinion.
The concern of the auditors while framing a report should not only be confined to the management or to those people who have a direct interest in the business of the company. Rather the interests of potential shareholders and creditors should also be covered.
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