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Audit report is the final stage of audit process. The results of the audit are communicated through audit report. Audit report is the written opinion of an auditor regarding companies financial statements. Audit report is a document prepared by an auditor to certify the financial position and accounting records of a firm.
Audit report is the statement included in the financial statements. It contains the opinion of the auditor in financial statements. The auditor reports to the shareholders who have appointed him. He has to provide his opinion on the truth and fairness of financial statements. Thus, the auditor protects the interest of shareholders through audit report.
Lancaster has defined a report as “a report is a statement of collected and considered facts, so drawn up as to give clear and concise information to persons who are not already in possession of the full facts of subject matter of the report.”
According to Cambridge Business English Dictionary, Audit report is defined as a formal document that states an auditor’s judgment of a company’s accounts.
Under Sec. 143(3), auditor of a company must report to its members.
(a) The accounts examined by him;
(b) Balance Sheet, Profit and Loss Account, and Cash Flow statement, which are laid in general meeting of a company during his tenure of office; and
(c) The document declared to be attached to the Balance Sheet and Profit and Loss Account.
1. Title of the report
The title of audit report should help the reader to identify the report. It should disclose the name of the client. The title distinguishes the audit report from other reports.
2. Name of the Addressee
The addressee normally refers to the person who appoints the auditor. If a company appoints the auditor, the addressee should be shareholders. As per law, the complete address of the addressee is required. Addressee for the statutory audit shall be shareholders and in case of Special Audit, it is Central Government.
3. Introductory Paragraph
The introductory paragraph should specify that it is the auditor’s opinion on financial statements audited by him. The period covered by financial statements should be stated with exact dates.
This part should include the matter-of-fact relating to the manner in which audit examination was made. The audit examination should cover company’s accounts, Profit and Loss Account, Balance Sheet and Cash Flow Statements. The examination should be as per the relevant law. The auditor should not curtail or limit any examination task.
The auditor’s opinion on the books of account and financial statements examined by him is based on the information and free from bias. The auditor has to give his opinion as follows:
· Whether the financial statements are arithmetically correct and correspond to the figures recorded in the books of accounts.
· In case of unqualified opinion, whether the financial statements represent a true and fair view of the state of affairs and the results of operations.
· In case of qualified opinion, if the Balance Sheet and Profit and Loss account do not present a true and fair view, the reasons for what and where is wrong.
The signature part should include the manual signature of the auditor.The personal name and signature of the auditor should be given. If the auditor is a firm, the signature in the personal name and firm name should be given.
7. Place of Signature
This should include the location of the auditor or the auditor firm, which is ordinarily their city.
8. Date of the Report
The date of completion of the audit work should be mentioned in this section.
As per Sec. 143 of the Companies Act, the auditor’s report shall also state—
a. whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements;
b. whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him;
c. whether the report on the accounts of any branch office of the company audited under sub-section (8) by a person other than the company’s auditor has been sent to him and the manner in which he has dealt with it in preparing his report;
d. whether the company’s Balance Sheet and Profit and Loss account dealt with in the report are in agreement with the books of account and returns;
e. whether, in his opinion, the financial statements comply with the Accounting Standards;
f. the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company;
g. whether any director is disqualified from being appointed as a director under sub-section (2) of section 164;
h. any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith;
i. whether the company has adequate internal financial control system in place and the operating effectiveness of such controls;
j. such other matters as may be prescribed.
The audit report may be of the following types:
1. Clean or Unqualified Report
Clean or Unqualified report will be given by the auditor if the auditor is satisfied that the accounts, Balance Sheet, Profit and Loss Account and Cash Flow statement do represent a true and fair view and they are prepared in conformity with the accounting principles and statutory requirements.
2. Qualified Report
In qualified report the auditor believes that overall financial statements are not fairly stated. The reasons for giving Qualified Report are be as follows:
i. The books of accounts, Profit and Loss Account and the Balance Sheet do not represent the true and fair view of the state of affairs and results of the operations, due to lack of conformity with the accounting principles and statutory requirements,
ii. The auditor is not able to verify the value and existence of certain assets,
iii. The information requested by the auditor is not furnished,
iv. Proper books of account are not maintained as required by law,
v. Part of audit examination done by other auditors.
3. Adverse or Negative Report
When there is sufficient basis for the auditor to form an opinion that the whole accounts and financial statements, do not present a true and fair view of the financial condition and results of operation, the adverse or negative opinion will be given. The adverse or negative report will be given on the following grounds:
· When the auditor is not satisfied with the truth and fairness of financial statements,
· Non conformity with the Generally Accepted Accounting Principles,
· Mistakes, discrepancies and material misstatement in the financial statements,
· Omission of a material disclosure.
4. Disclaimer Report
The auditor may disclaim or refuse opinion on the accounts, Profit and Loss Account and the Balance Sheet, when he does not have sufficient information to base his opinion. In the scope and opinion paragraph, the auditor should give disclaimer information. This may happen on the following grounds:
· The auditor has not been able to obtain sufficient information to form his opinion,
· The audit examination is not adequate to form an opinion,
· There are some material un-determined item in audit examination.
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