When an auditor gives a report without showing any defect in it it is called?

Once an external auditor finishes the auditing of a company, he begins a report where he consolidates all the findings, observations, and how he thinks the company’s financial statements are reported; this report is called an audit report.

An audit report is a written opinion of the reliability of the business’s financial statementsBusiness's Financial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more and is provided by the chartered accountants auditing the company.

The audit report format is fixed as per the generally accepted auditing standards. But certain changes are allowed to be made as per the auditor’s requirement, which depends upon the audit work circumstances.

Table of contents

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If you want to learn more about Auditing, you may consider taking courses offered by Coursera –

1. Auditing I: Conceptual Foundations of Auditing
2. Auditing II: The Practice of Auditing

Audit Report Opinion Types

Let us discuss the following types.

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#1 – Clean Opinion

An auditor gives an unqualified opinion, also known as an unqualified opinion, if, according to him, the financial statements are true and fair, and there is no material misstatement in them.

#2 – Qualified Opinion

This type of audit reportType Of Audit ReportThere are four different types of the audit reports that the company's auditor can issue based on the analysis of the company’s financial statements. It includes Unqualified Audit Report, Qualified Audit Report, Adverse Audit Report, and Disclaimer Audit Report.read more opinion is given by the auditor if, in the financial statements, there is no material misrepresentation. Still, financial statement preparation is not following generally accepted accounting principles (GAAP).

#3 – Adverse Opinion

The worst type is the adverse opinionThe Adverse OpinionAn adverse opinion is the auditor's findings of misrepresentation and misstatement of the company's financial health and performance as identified in the financial statements. It is the conclusion of the professional assessment of the corporate accounts depicting false or unfair business practice.read more that an auditor can give. It reflects that the financial statements of an entity are materially misstated, misrepresented, and do not reflect its correct financial performance.

#4 – Disclaimer of Opinion

If the auditor fails to frame an opinion about the company’s financial statements, then he gives a disclaimer of opinion. The disclaimer can be the lack of audit evidence or the restriction by the client to examine all the records etc.

All the investors and lenders require a clean report before investing in the business. The auditor issues the audit report to the entity’s financial statement usersEntity's Financial Statement UsersFinancial statements prepared by the Companies are used by different categories of individuals and corporates on the basis of their relevancy to the respective parties. The most common users to the financial statements are Management of the Company, Investors, Customers, Competitors, Government and Government Agencies, Employees, Investment Analysts, Lenders, Rating Agency and Suppliers.read more. The public companies must attach the audit report with the financial statements before filing it with the Securities and Exchange Commission.

Contents

The audit report includes the following contents.

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#1 – Title: The title should be an ‘Independent Auditor’s ReportIndependent Auditor's ReportAn independent auditor report is a report issued by an independent auditor following an examination of an organization's financial statements, books of accounts, financial transactions, accounting practices, internal and external control. The auditor is an outsider appointed with the board's approval.read more.’

#2 – Addressee: It should be mentioned to whom the auditor’s report is given. For example, the case of a company auditor’s report is addressed to the company members.

#3 – Management Responsibility: After Addressee, the management responsibility towards the financial statement is to be written, which includes the responsibility of management towards the preparation and presentation of financial statements.

#4 – Auditor’s Responsibility: After management responsibility, the auditor’s responsibility is to be written, including the responsibility to issue an unbiased opinion on the financial statements.

#5 – Opinion: Then, the auditor must write his own audit report opinion on the truth and fairness of the financial statements specifying the basis of such opinion.

#6 – Basis of Opinion: State the basis of the fact;

#7 – Other Reporting Responsibility: After all the above points, if there is any other reporting responsibility, then the same is required to be mentioned, such as Report on Other Legal and Regulatory Requirements.

#8 – Signature: Then the signature is to be done by the engagement partner of the audit firm. They provide the required input. Below is the name of the engagement partner and the audit firm.

#9 – Place and Date: Finally, the place of signature and the date of signing are to be mentioned.

Example

Suppose there is a company named XYZ in the U.S. As per the law prevailing in the U.S., XYZ is required to appoint an outside auditor who has to review its financial statements to ensure the accuracy of the financial statements.

After reviewing the company’s financial statements, the auditor will issue the auditor report reflecting the auditor’s opinion about the accuracy of the financial statements and their conformity to GAAP.

Advantages of the Audit Report

• The management is different from the auditor, so the auditor is independent of his decision. So the auditor’s report can provide knowledge about the integrity and honesty of the management, i.e., whether the company’s management is true toward the company’s shareholders.
• It assures the financial statements as it is issued by the professional having an unbiased opinion as he is not a part of the company’s management. This report helps the users of the financial statements to get assured of the truth and fairness of the financial statement.
• It helps the stakeholders to get knowledge about the operational and financial position of the company. It helps the stakeholders to know the prospects of the company as an auditor is required to report in its audit report if there are some issues with the company which can affect its going concern. The problem affecting going concern can be the financial or non-financial problems that the company faces.

Disadvantages/Limitation of Audit Reports

• Sometimes management does not provide the auditor full access to the audit evidenceAudit EvidenceAudit evidence is information gathered by auditors during the course of an audit, whether internal, statutory, or otherwise. These facts serve as the foundation for the opinion in the audit report.read more. As per the auditing standards, management should provide all the information that the auditor demands, but in real life, the management may prevent the auditor from getting access to sensitive information as they may have doubts about the confidentiality of the auditor. These kinds of problems may affect the quality of the auditor’s opinionAuditor's OpinionAn auditor’s opinion is a statement presented by an independent auditor revealing the authenticity of a company’s financial statements.read more.
• It is required that the auditor should be independent of their client. But sometimes, the client may influence the auditor, resulting in the auditor’s issuance of an incorrect report.
• It is required that the auditor should be independent of their client. But sometimes, the client may influence the auditor, resulting in the auditor’s issuance of an incorrect report.

Important Points

• The auditor’s opinion mostly covers the financial statements prepared for 12 months or one financial year. This report is then used by the stakeholders, management, investors, the board of directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more, the government body, lenders, and other parties interested in the business.
• The investors use it to assess the entity’s financial performance on the basis that only they will decide whether to invest in that company or not.
• It is used by the Government agency to assess the accuracy and completeness of tax declarations and to check that there is no tax evasion.
• It is used by the ShareholdersThe ShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.read more and the board of directors to assess the transparency of the financial statement and the integrity of the management.

Conclusion

For the companies, it is mandatory to get their financial statements audited. As discussed above, the auditor, after performing audit proceduresPerforming Audit ProceduresAudit Procedures are steps performed by auditors to get evidence regarding the quality of the financial information provided by the management of a company. It enables them to form an opinion on financial statements and ensure whether they reflect the true and fair view or not. read more, issues an audit report, which can be one out of the four types of opinions depending upon the nature of material misrepresentation or misstatement detected by the auditor, and if no misstatement is detected, then the auditor issues a clean report.

Recommended Articles

This has been a guide to the Audit Report and its definition. Here we discuss the importance of audit reports, along with examples, advantages & disadvantages. You can learn more about it from the following articles –

When an auditor gives report without any defect it is called as?

What is a clean report?

What is clean or unqualified report?

What are the 4 types of auditor's reports?