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In: Accounting

You are required to elaborate more on Auditor's Report: i) Explain the contents or elements of...

You are required to elaborate more on Auditor's Report:
i) Explain the contents or elements of auditor's report.
ii) Explain the different types of auditor's report (ummodified audit report & modified audit report).
iii) Understand and elaborate the different circumstances under which each type of auditor's report is issued.
iv) Understand and elaborate the importance of key audit matters.

This question has an overall of 100 marks altogether. Use any explanatory method available to elaborate more on Auditor's report.

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Expert Solution

AUDITING

The term audit is derived from the Latin word “au dire,” which means to hear.in early days a person used to listen to the accounts read over by an accountant in order to check them. He was known as auditor. According to ICAI defines Auditing as “ auditing is defined as a systematic and independent examination of data, statements, records, operations and performance of an enterprise for a stated purpose.in any auditing situation, the auditor perceives and recognizes the propositions before him for examination ,collect evidence ,evaluate the same , and on this basis formulates his judgment which is communicated through his audit report”

Financial auditing is the process of examining an organizations (or individual's) financial records to determine if they are accurate and in accordance with any applicable rules (including accepted accounting standards), regulations, and laws. External auditors come in from outside the organization to examine accounting and financial records and provide an independent opinion on these records. Law requires that all public companies have their financial statements externally audited. Internal auditors work for the organization as internal employees to examine records and help improve internal processes such as operations, internal controls, risk management, and governance.

Auditors report

For any enterprise, the audit report is a key deliverable which shows the end results of the entire audit process. The users of financial statements like investors, lenders, customers, and others base their decision and plans on audit reports of any enterprise. An audit report is always critical to influencing the perceived value of any financial statements audit.

The auditor should be careful in issuing the audit report as there is are a large number of people placing reliance on such report and taking decisions accordingly. The report should be issued by being unbiased and objective in discharging the functions.

The typical audit report contains three paragraphs

1. The responsibilities of the auditor and the management of the entity.

2. The scope of the audit.

3. The auditor's opinion of the entity's financial statements.

Content and elements of an audit report

Heading

Brief of contents

Title

Title should mention that it is an ‘Independent Auditor’s Report’.

Addressee

Should mention clearly as to whom the report is being given to.

For example Members

Management’s Responsibility for Financial Statements

Mentions that it is the Management’s responsibility to Prepare the Financial Statements. f the company, Board of Directors

Auditor’s Responsibility

Mention that responsibility of the Auditor is to express an unbiased opinion on the financial statements and issue an audit report.

Opinion

Should mention the overall impression obtained from the audit of financial statements.

For example Modified Opinion, Unmodified Opinion

Basis of the Opinion

State the basis on which the opinion as reported has been achieved. Facts of the basis should be mentioned.

Other Reporting Responsibility

If any other reporting responsibility exists, the same should be mentioned.

For example Report on Legal or Regulatory requirements

Signature of the Auditor

The engagement partner (auditor) shall sign the audit report.

Place of Signature

The city in which audit report is signed.

Date of Audit Report

Date on which the audit report is signed.

Types of audit report

1. Unqualified report

Often called a clean opinion, an unqualified opinion is an audit report that is issued when an auditor determines that each of the financial records provided by the small business is free of any misrepresentations. In addition, an unqualified opinion indicates that the financial records have been maintained in accordance with the standards known as Generally Accepted Accounting Principles (GAAP). This is the best type of report a business can receive.

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. The writing of a qualified opinion is extremely similar to that of an unqualified opinion. A qualified opinion, however, will include an additional paragraph that highlights the reason why the audit report is not unqualified

3. Adverse Opinion

The worst type of financial report that can be issued to a business is an adverse opinion. This indicates that the firm’s financial records do not conform to GAAP. In addition, the financial records provided by the business have been grossly misrepresented. Although this may occur by error, it is often an indication of fraud. When this type of report is issued, a company must correct its financial statement and have it re-audited, as investors, lenders and other requesting parties will generally not accept it.

4. Disclaimer of Opinion

On some occasions, an auditor is unable to complete an accurate audit report. This may occur for a variety of reasons, such as an absence of appropriate financial records. When this happens, the auditor issues a disclaimer of opinion, stating that an opinion of the firm’s financial status could not be determined.

5. Modified report

The modified opinion means the future amendments which have to be followed in order to make the financial statement transparent and clear. Modified opinion is somehow similar to the qualified opinion where the auditors suggest the future procedures to avoid the misstatement in the financial statements. While giving the modified opinion, the auditors must have some set of strong evidences which will support their opinion. Although they are not fully liberal to suggest and implement any procedure, here also there is the intervention of the managers and other management staff.

             An auditor gives an unmodified opinion if the financial statements present true and fair view. In all other circumstances, the auditor gives a modified opinion. The auditor uses different techniques and methods and also applies different procedures to see if the financial statements are free of material misstatements

6. Un modified report

Unmodified opinion is the opinion where auditor expresses an opinion that financial statements are presented, in all material respects, in accordance with applicable financial reporting framework. Unqualified opinion is the opinion where auditor expresses an unmodified opinion

Circumstances under which each type of auditor's report is issued

The auditor's report is a written letter from the auditor containing the opinion of whether a company's financial statements comply with generally accepted accounting principles (GAAP). The independent and external audit report is typically published with the company's annual report. The auditor's report is important because banks and creditors require an audit of a company's financial statements before lending to them. In this article, we explain what goes into an auditor's report as well as review an example of an audit report.

The qualified audit report is one of the three modified audit reports where the opinion is issued to the financial statements that are not prepared in all material respect while those misstatements are not pervasive.

Qualified report is given by the auditor in either of these two cases:

1. When the financial statements are materially misstated due to misstatement in one particular account balance, class of transaction or disclosure that does not have pervasive effect on the financial statements.

2. When the auditor is unable to obtain audit evidence regarding particular account balance, class of transaction or disclosure that does not have pervasive effect on the financial statements.

A Qualified Opinion report is issued when the auditor encountered one of the two types of situations which do not comply with generally accepted accounting principles, however the rest of the financial statements are fairly presented. This type of opinion is very similar to an unqualified or "clean opinion", but the report states that the financial statements are fairly presented with a certain exception which is otherwise misstated.

Importance of key audit matters

SA-701 -“Communicating Key Audit Matters in the Independent Auditor’s Report”

SA 701 is applicable for audits of financial statements for periods beginning on or after April 01, 2018 for audits of complete sets of general purpose financial statements of listed entities. It casts a new reporting requirement on auditors of listed entities to communicate the key audit matters in their audit reports. This Standard is also applicable in audit of unlisted entities in situations where law or regulation requires communication of key audit matters in the audit report.

                              Key audit matters are those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with those charged with governance.

                           Areas of significant auditor attention often relate to areas of complexity and significant management judgment in the financial statements, and therefore often involve difficult or complex auditor judgments. In turn, this often affects the auditor’s overall audit strategy, the allocation of resources and extent of audit effort in relation to such matters. These effects may include, for example, the extent of involvement of senior personnel on the audit engagement or the involvement of an auditor’s expert or individuals with expertise in a specialized area of accounting or auditing, whether engaged or employed by the firm to address these areas.

Accordingly, matters that pose challenges to the auditor in obtaining sufficient appropriate audit evidence or pose challenges to the auditor in forming an opinion on the financial statements may be particularly relevant in the auditor’s determination of key audit matters.


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