What is an Audit Report?
Audit Report is the report that is issued by the auditors in order to express their opinions regarding financial statements, and whether they are reflective of the actual financial standing of the company. The main rationale behind audit reports is to inform the users of the financial statements that there has been no material misstatement, and the auditors are reasonably assured of the fact that all the assertions made in these statements are true.
In this regard, the underlying objective of the auditor is to ensure that they are able to express their opinion on financial statements, and if these financial statements are free from errors. Based on the audit process that is undertaken, there are four types of reports that can be prepared by the auditors.
What are the types of Audit Reports?
There are four different types of audit report that can be prepared. They include the following:
- Unqualified Audit Report
- Qualified Audit Report
- Adverse Audit Report
- Disclaimer of Opinion Audit Report
Further details of these types of audit reports are mentioned below:
Unqualified Audit Report
An unqualified Audit Report is defined as the report that is issued by the auditors in order to express their opinion about the financial statements not containing any material misstatement. This is also referred to as a clean report because of the fact that it gives a heads up that all the affairs within the company are dealt with under accountancy principles.
This gives an indication to the stakeholders (particularly the shareholders) that there are no inherent problems in the way in which financial statements have been presented by the company.
Unqualified Audit Report means that the auditors have been able to get substantial evidence proving the fact that there have been no issues pertaining to the financial statements, and the fact that they can be considered as safe tools for decision making.
Therefore, this report is reflective of the fact that the auditors are assured that company’s operations, as well as other related operations are in full compliance with governance principles and applicable laws. This implies that financial statements are free from all kinds of errors or material misstatements.
Qualified Audit Report
A qualified audit report is considered to be a report that is issued by the auditors in the scenario where they feel that the financial statements are materially misstated, or they are not fully convinced with the way the company is operating.
Having a qualified audit report on the record tends to be catastrophic from the perspective of the company, primarily because of the fact that it leads to a severe loss of trust on the part of the employer. Auditors issue this as a last resort, essentially when they believe that they have lost all rationale, and they cannot take up the responsibility of ensuring external stakeholders about the accuracy and overall efficacy that is depicted in the financial statements.
The main reason, however, on which qualified audit reports are issued lies on the realms of records not being prepared in accordance with the stated accounting principles.
Similarly, they can also issue qualified audit reports if the management fails to cooperate with them during the audit process.
Qualified audit report is detrimental from the perspective of the company, and it tends to leave a drastic impact which might be irrecoverable.
Adverse Audit Report
This type of audit report is issued when the auditors discover significant material misstatements or irregularities in the manner in which financial statements have been prepared. These inconsistencies need to be duly communicated to the stakeholders, in order to diminish the responsibility on part of the auditor, pertaining to the audit of the financial statements.
Adverse Audit Report tends to be a very significant red flag from the perspective of the company. This is because of the fact that it shows that there are certain issued with the financial statements, and this raises several questions on the ground of fraudulent activities within the company.
Hence, this type of audit report explicitly states that there are certain issues with the company, and they are not meant to be held accountable in the case where the company defaults, or fails to honor their debts. Like qualified audit report, this is also detrimental from the perspective of the company, because it tarnishes their reputation quite severely.
Disclaimer of Opinion Audit Report
Disclaimer of Opinion Audit Report is the fourth type of audit report that might be issued by the auditor. This type of audit report tends to convey the fact that the auditor was unable to conduct an audit in a proper manner. There can be numerous different reasons behind the auditor issuing this type of audit report. Firstly, this report might be issued if the management had created hindrances that prevent the auditors from properly executing the required tasks.
In the same manner, disclaimer of opinion audit report might also be issued in the case where auditors are not entirely sure of the transactions, and they have insufficient proof to test their assertions and gain reasonable assurance.
Disclaimer of Opinion Audit Report is often problematic from the perspective of the company, because it also raises several suspicions regarding the efficacy of the company, and if there are any fraudulent activities that the organization is involved in.
Audit Report and its implications for the organization
As mentioned earlier, audit process is perhaps on the most important processes that all organizations have to go through.
In this regard, it is important to consider the fact that the subsequent audit report that is generated as an outcome of the audit process tends to be have an everlasting impact of the company. For all the different types of audit reports that are issued, there are different repercussions and implications. They are summarized in the table below.
|Type of Audit Report||Implication|
|Unqualified Audit Report||This is the safest report that can be issued. In the case where auditors issue an unqualified audit report, the organization does not need to worry about anything as such. It shows that their financial statements have no material misstatements, and all the operations in the company are in compliance with the government policies.|
|Qualified Audit Report||This is perhaps the most damaging audit report that is issued by the auditor. This type of audit report implies that the auditors are not fully convinced regarding the operations within the company, and hence, they have failed to get reasonable assurance that the financial statements are free from material misstatements. This significantly damages the reputation of the company.|
|Adverse Audit Report||In the case where an adverse audit report is issued by the company, it implies that the auditors have certain concerns regarding the preparation of financial statements. It implies that there are perhaps some bookkeeping errors, or some window dressing type tactics involved in the company that has resulted in a material misstatement in the financial statements. The company ends up losing trust from investors and their trade partners as a result.|
|Disclaimer of Opinion Audit Report||Disclaimer of Opinion Audit Report is issued in order to convey that the auditors were unable to gather evidence that could help them formulate their opinion. This implies that the organization is hiding something from the stakeholders, because of which they are not cooperating with the auditors. This also raises several questions about the accuracy of the financial statements presented.|