Definition of Audit Report Types
Audit reports comprise of the auditor’s opinion over the status of the company’s financial statements. In other words, audit reports are an appraisal of the company’s complete business activities. It contains an independent auditor’s opinion over the financial statement, a reference towards the financial reporting framework (GAAP/ IFRS) used while preparing the financial accounts. In many countries, publicly traded company companies are required by law to get their audit done by an independent auditor once a year.
The issuance of an audit report is the final conclusion of the audit process of the company. An audit report is of great relevance because investors base their investment decision on the audit result of the companies. In addition to this, the companies that are looking to improve on their internal controls also find audit report information very beneficial.
Apart from the investors, audit reports are also used by the board of directors to make business decisions and by other stakeholders like government bodies, banks, etc. The Board of directors and shareholders use the audit report to assess the transparency of financial statements and the efficiency of the management. Whereas government bodies use audit reports for assessing the completeness and accuracy of tax declaration. The audit report usually covers the period of the last 12 months of the company. In a way, the audit report is a measure of the company’s financial worth for a specific period of time.
Types of Audit Reports
There are four types of audit reports that can be issued to the company based upon the auditor’s opinion. The audit report is prepared based upon examining the company’s financial statements by the auditors. The four types of audit reports include unqualified audit reports, qualified audit reports, adverse audit reports, and disclaimer audit reports.
- Unqualified Opinion or Unqualified Audit Report: In other words, it is a clean audit report that means that the company’s financial statements are free from any material misstatements and provide a true and fair view of the company’s financial position. But for an unqualified audit report to be reliable, it should be issued by the independent auditors performing the audit. This is the best type of audit report issued by the auditors in favor of a company and indicates the genuineness of a company’s financial statements.
- Qualified Opinion or Qualified Audit Report: Qualified audit report is somewhat similar to an unqualified report, but auditors could not issue an unqualified opinion due to a specific transaction or due to the fact that financial statements were not prepared in accordance with the GAAP (generally accepted accounting principles). Apart from this, there were no material misstatements found in the financial records. Auditors will include an additional paragraph in their audit report detailing why they could not issue an unqualified opinion or audit report.
- Adverse Opinion or Adverse Audit Reports: Adverse audit report or opinion is issued by the auditors when they find material misstatements in the company’s financial statements. These material misstatements are impacting the complete financial statements, and therefore the financial statements cannot be trusted by stakeholders, investors, or the government. Auditors will generally provide the detail of misstatement found in their audit report and quantity the effect of the same so that stakeholders can be conscious while analyzing the financial statements on their own. But these audit reports are generally not accepted by shareholders, lenders, or other stakeholders. Whenever the auditors issue an adverse opinion on the company’s financial statements, the company must correct its financial statement and get the re-audit done. The adverse audit report is the worst kind of audit opinion that the auditors can issue.
- Disclaimer of opinion or Disclaimer Audit Report: A disclaimer audit report or opinion is issued by the auditors when they are unable to perform audit activities falling under their scope to understand the true nature of transactions or find sufficient evidence to substantiate the account balances. In other words, they cannot express a definitive opinion over the company’s financial statements. This generally happens when there is an absence of proper financial records or auditors do not get sufficient support from the management. This type of report creates a negative reputation for the company in the market.
From the above discussion, we can now understand the different types of audit reports issued by the auditors and the basis upon which they form their opinions. Audit reports are a kind of assurance given over the financial soundness of the company. It also helps internal management improve their internal controls in the business. It helps shareholders and the board of directors assess the integrity and efficiency of the internal management. Finally, it also assists investors in making their investment decisions.
This is a guide to Audit Report Types. Here we also discuss the definition and types of audit report along with an explanation. You may also have a look at the following articles to learn more –