Question

In: Accounting

What’s the reason behind issuing audit report after management acceptance of financial report?

What’s the reason behind issuing audit report after management acceptance of financial report?

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Expert Solution

The reason behind issuing the audit report after management acceptance of the financial report

The audit report is important because banks, creditors, and regulators require an audit of a company's financial statements. A clean audit report means a company followed accounting standards while an unqualified report means there might be errors

Provide assurance on Financial Statements. Audit reports issued by a professional and independence auditor which is operational independence from the management of the entity. The report issued from them could help the users of the financial statement to assure that financial information is correct or not.

  • The auditor's report is a document containing the auditor's opinion of whether a company's financial statements comply with GAAP.
  • The audit report is important because banks, creditors, and regulators require an audit of a company's financial statements.
  • A clean audit report means a company followed accounting standards while an unqualified report means there might be errors.
  • An adverse report means that the financial statements might have had discrepancies, misrepresentations, and didn't adhere to GAAP.

The goal of an auditor's report is to document reasonable assurance that a company's financial statements are free from error. Along with balance sheets, profit & loss statements, and directors reports, auditor's reports make up part of a company's statutory accounts.

Advantages of Audit Reports:

  • Provide assurance on Financial Statements. Audit reports issued by a professional and independence auditor which is operational independence from the management of the entity. The report issued from them could help the users of the financial statement to assure that financial information is correct or not.
  • Prove management integrity on their shareholders. As auditor is independence from management, the report could prove whether managements are honest to their shareholders or not. This is related to principle and agency theory.
  • It is the requirement of law and regulation. Most of the countries required the entities which have the specific criteria to have their financial statements audited by independent auditors. Those criteria like annual turnover, the value of assets, and the number of employees. The auditor is the evidence that could prove to the government that the entity is complying with the law.

Components of an Auditor's Report

The auditor's letter follows a standard format, as established by generally accepted auditing standards (GAAS). A report usually consists of three paragraphs.

Clean or Unqualified Report

Qualified Opinion

Adverse Opinion

Disclaimer of Opinion


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