Question

What are the issues, values and futures of an audit report?

Answer 1

Answer. Audit Report:

An auditor's report provides an opinion on the validity and reliability of a company’s financial statements

A typical auditor's report will state:

1. The company that has been audited and what their accounting method is
2. The responsibility of the auditor and their report
3. Reservations (if any)
4. Conclusion
5. Any additional information*
6. A management report*
7. The date and auditor’s signature

Types of Audit Report:

Different types of audit report contain different audit’s opinions and the main cause are from the different of misstatements found in the financial statements. Different types of audit reports represent a different level of assurance.

Four Types of Audit Reports:

There are four types of audit reports issued by auditors on financial statements. Each type of report contains different meanings and messages from auditors to users of financial statements.

Those audit reports included the Unqualified Audit Report (Clean Audit Report), Qualified Audit Report, Disclaimer Audit Report, and Adverse Audit Report. The following are the detail of audit reports.

1. Unqualified Audit Report (Clean Audit Report):

Unqualified Audit Report issued by the auditor to financial statements when auditors found no material misstatements after their testing. This report contains an unqualified opinion from an independent auditor.

2. Qualified Audit Report:

The qualified Audit report is the report that issue by auditors to the financial statements that found material misstatements on them. But those material misstatements are not pervasive.

3. Adverse Audit Report:

Adverse Audit Report is a type of audit report issued to the financial statements when auditors found that there are material misstatements in the financial statements.

The misstatements found here are different from the material misstatements found in qualified audit reports.

4, Disclaimer Audit Report:

The disclaimer audit report is the report that issues the financial statements where there is matter to auditor’s independence and those mater cause auditors not be able to obtain sufficient audit evidence to support their opinion.

Issues with Audit Report :

• The scope of the audit might be limited by management. This is a popular discussion about audit’ issues. In the audit standard, auditors should have the full right to access any kind of information that could help them to obtain audit evidence to express their opinion. However, in practice, management might try their best to prevent auditors to obtain some sensitive information. These are probably the management don’t fully trust auditors ethic related to confidentiality or management themselves have integrity problems. These problems might prevent auditors to provide the best quality of audit opinion that it should be.
• Time too constraints for auditors. In practice, auditor normally faces time constraints which do not provide them enough time to perform their testing as they should be.
• Auditors’ Independence. The code of ethics required auditors to stay independence from their audit clients. This is to make sure that auditors do not bias when they perform their works as well as when they issue audit opinion.
• Risks that might not detect by auditors: Inherent Risks and Fraud Risks. Audit standard requires auditors to have proper audit planning as well as risks assessment. This is to make sure that the auditing quality is maintained, and audit risks are identified and minimize. However, these things could not auditor to eliminate all kind of risks of material misstatement from financial statements. For example, inherent risks and fraud risks.
• Auditors Qualification and Competency. An Auditor may not be qualified or competent to prepare a good and proper Audit Report.

Value and Future of Audit Report:

Audit reports are referred to as a starting point to draw high-level conclusions of companies including any material misstatements in the financial statements. Investors also see the added value from Key Audit Matters (KAMs) that draw their attention to certain risk areas in the company.

However, participants commented that auditors are not communicating their value beyond the audit report. While audit committees are appreciative of the effort and rigour of audit work performed before a true and fair opinion can be rendered, investors are unable to perceive further value beyond the audit opinion.

Hence, participants suggested that even without any expansion in audit scope, audit reports could increase its communicative value by including an assessment of the effectiveness of internal controls, risks, early warning signs on going concern, compliance with the Corporate Governance Code (CG Code), and assessment of corporate culture, etc.

Investors also added that the communicative value of the audit report will be enhanced if it were accompanied by greater interaction between auditors and investors. If a company has issues, investors would want to hear from the auditors through platforms such as the annual general meetings.

Recognising the spectrum of stakeholders’ needs from an audit, there may inadvertently be a gap between what is expected from an audit, and what an audit actually does. Corporate failures tend to widen this gap when there is undue focus on what the auditors failed to do, vis-à-vis the role of other stakeholders in the corporate reporting ecosystem. Therefore, it is necessary to educate the market on what an audit is and is not, whether through better clarity in the audit report or through other means.

There are opportunities to increase the relevance of the auditor’s report -- for example, attestation of the critical accounting estimates section of the MD&A, or discussion of critical audit matters. But a couple of caveats are important here. Auditors should not be the original source of information about the company; the report should focus on objective information; and any changes to the auditor’s reporting model should add value and clarity - versus creating investor misunderstanding or expanding the “expectations gap” in terms of what an audit does and does not do.