Understanding an Audit Report
Table of Contents
- Why Is Understanding an Audit Report Important?
- Elements of an Audit Report
- How to read an Audit Report
- FAQs: Understanding an Audit Report
- Why should you choose N R Doshi & Partners?
The primary objective of conducting an external audit is to ensure that the company’s financial statements are accurate and transparent. Financial stakeholders need to understand an Audit Report because it will enable them to make better financial decisions.
Moreover, stakeholders appoint independent auditors to conduct unbiased audits. The auditor examines vouchers, books, ledgers, registers, cash flow statements, balance sheets, profit, loss statements, etc., to detect errors & suggest solutions.
There may be minor errors or inaccuracies in the financial documents, but auditors must highlight fraud & other malpractices immediately. Skillful & experienced auditors in UAE will conduct unbiased inspections and disclose facts for the firm’s benefit.
The final audit report will help investors, stakeholders & other decision-makers to understand a company’s present financial situation and make wise decisions.
Further, this blog will shed light on various techniques to help you decipher an audit report & know what is behind the numbers. Eventually, these steps will enable better decision-making & transparency.
Why is it Important to Understand an Audit Report?
Benefits of Understanding an Audit Report
Suppose you get access to a company’s audit report. If you draw a conclusion based on the report’s figures, you may miss critical facts. It will surely, not be easy to understand things without the supporting documents, knowledge of accounting policies & principles, and procedures followed while audit reporting.
Let us say you get access to all the documents & required information, but it will be hard to conclude without an auditor’s experience & keen eyes. An auditing company in UAE will examine all the documents and summarize facts & figures so that you can utilize them to your benefit. Along with adherence to a proper reporting framework & evaluation technique, an auditor should ensure the following-
- The relevant accounting policies have been applied while preparing financial documents and disclosed. Moreover, these policies should be appropriate and consistent with the applicable financial reporting framework.
- The accounting estimates made by the management are reasonable.
- The financial reports must be informative, credible, relevant, comparable & understandable by the company’s stakeholders.
- The financial documents indeed should disclose the effect of material transactions and events on the business.
- The terminology and titles used in the financial documents are correct.
When you understand an audit report, you will know about the audit’s scope & opinion, responsibilities of the auditor, and management. Not only that, but a thorough understanding of the audit reports will also tell you the hidden story behind the numbers.
Elements of an Audit Report
Format of an Audit Report
An audit report has various elements, as well as every element is crucial. An auditor must prepare a report by considering the audit report format & other vital elements.
Further, we will discuss all the elements of audit reporting so that you can understand reports better.
Title of Audit Report
An audit report’s title indicates that an independent auditor has prepared the report. Additionally, it also assures readers that the report provides an unbiased opinion with the necessary details.
The Addressee of the Audit Report
The auditor report must clearly state for whom it has been prepared. An auditor addresses the report to the shareholders or the company’s board of directors. Further, the addresses may change depending on the country’s laws and the engagement’s terms & conditions.
The auditor’s opinion is of utmost importance because it provides an honest overview of the company’s financial situation. Readers going through an audit report must pay special attention to this section. What does the opinion sector of the auditor’s report include?
Following are the reasons:
- Identifies the auditee & states that the financial statements have been audited
- Identifies each statement’s title forming part of the financial statements
- Refers to the notes in the accounts & relevant accounting policies
- Lastly, it specifies each statement’s date/period forming part of the financial statements
4 Types of Audit Reports Issued by Auditors in the UAE:
An unqualified opinion is where the auditor finds the company’s financial statements accurate & do not require modification. Moreover, it is often referred to as an unmodified/clear opinion, and such an opinion creates a positive impression on stakeholders.
An auditor in the UAE delivers a qualified opinion when he concludes that it is impossible to issue an unqualified opinion. Consequently, a single misstatement is not a solid reason to issue an adverse opinion or a disclaimer of opinion.
An auditor expresses an adverse opinion when he finds serious mistakes or misstatements in the company’s financial statements. The auditor’s adverse opinion may lead to a company’s closure or a change in company management. An auditor must report any fraud or financial malpractices to the authorities.
Disclaimer of Opinion
The auditor expresses a Disclaimer of opinion when he does not get the required information from the company. In the absence of relevant information, the auditor will not be able to conclude & prepare a transparent report that depicts the company’s financial situation.
Further, disclaimer of Opinion presents a negative picture of the company, and the company’s shareholders will be hesitant to trust the company.
Further more, to understand an audit report, you must carefully read the auditor’s opinion. Based on the auditor’s opinion, you can decide if you want to trust the company.
Basis of Opinion:
The Basis of opinion provides context to the opinion, and it adds further credibility to the audit report, helping users understand the same. Following are the contents of this section.
- A Basis of Opinion states that the audit has been conducted as per the auditing standards.
- The Basis of Opinion clearly defines the auditor’s responsibilities under the auditing standards.
- It also includes a statement indicating that the auditor is independent of the entity and meets the relevant ethical requirements.
- The auditor also mentions whether he believes that the audit evidence obtained is sufficient and appropriate.
An auditing company in the UAE reports if the organization is a Going Concern as per the applicable Standards on Auditing.
Key Audit Matters:
In this audit report section, auditors communicate the complete set of audit matters. Besides the listed entities, auditors in the UAE may also have to add crucial audit matters related to entities if laws demand it. Furthermore, this section also provides additional information to individuals interested in understanding a report.
Responsibilities of Management for the Financial Statement:
The management is responsible for preparing the financial statements and presenting them to the auditor. These financial statements must be devoid of errors and material misstatements. Moreover, the management is also responsible for enforcing internal controls & checks to achieve operational efficiencies. The external auditor also clarifies these aspects to help readers understand the audit report.
Auditor’s Responsibilities as to the Audit of the Financial Statements:
This section of the audit report explains an auditor’s responsibilities while conducting an audit & preparing the report.
- An auditor mentions the objective of conducting an audit. Following are the two main objectives of conducting an audit are –
- Obtaining reasonable assurance that the audited financials are free of material misstatements.
- Issuing the audit report contains the auditor’s opinions about the financial statements
- The auditor ensures that the assurance should also provide the industry standards.
- The audit report must state that misstatements can arise from fraud/error and that they define the materiality as per the applicable financial reporting framework. The misstatements are considered material if they can influence the financial decisions of readers (decision-makers).
- Through the audit report, the auditor must convince the readers that he has exercised professional judgment & maintained transparency while outlining his responsibilities & performing the audit.
- The report must demonstrate that the auditor has understood relevant internal controls. The audit procedure must be significantly designed keeping in mind the internal control and circumstances.
- An auditor is also responsible for communicating the scope & time required for the audit to the management. The audit report must also include details about significant deficiencies found in the internal control found during the audit.
Other Reporting Responsibilities:
Suppose the auditor addresses other responsibilities apart from his current ones under Standards on Auditing. In that case, he will have to do that under a separate section titled – Report on Other Legal and Regulatory Requirements.
Signature of the Auditor and Auditor’s Address:
The auditor signs the audit report in his name. If an audit firm is appointed, he also signs the report in the firm’s name.
Place of Signature:
The auditor also adds the name of the specific location where the audit report is signed.
Date of the Audit Report:
The auditor puts a date on the report. It is the date when the auditor obtains sufficient and appropriate evidence regarding the company’s financial status & he needs to provide an opinion on the same. The audit report’s date conveys that the auditor has considered the effects of events & transactions that occurred on and before the date.
How to Read an Audit Report
How to find hidden stories behind the numbers
A person who knows how to read an audit report can make better financial decisions.
Reports are lengthy and complicated. It is not easy to comprehend the reports without adequate accounting knowledge as well as related policies, principles, and audit standards.
Why is it so vital to understand audit reports? The reason is that any decision you make based on your understanding will have financial consequences.
- Firstly, the primary objective of an auditor’s report is to help readers & decision-makers draw meaningful conclusions & make wise financial decisions. Apart from that, an audit report also provides reasonable assurance about the accuracy of financial statements & a transparency view of the company
- Secondly, by reading an audit report and financial statements, readers/decision-makers will gain valuable knowledge about the auditee. With this knowledge, readers will also know about the challenges & opportunities of the relevant sector along with the regulatory requirements. Most importantly, it will indeed enable them to understand the report better
- Thirdly, readers should know that auditors create audit reports & financial reports while considering the materiality concept. As per the materiality concept, immaterial items can be grouped or presented in a way that the auditor feels appropriate. Readers must consider this aspect while reading a report.
- Lastly, another thing readers must keep in mind is that specific figures in the audit report/financial statements are based on judgment, estimates, and outcomes of future events. Hence, there is always an element of uncertainty.
- Firstly, the auditor’s report lends credibility and credibility to the information presented in the financial statements. Understand that the audit report does not indicate appropriate business strategies, their future viability, or guarantee the existence of a thriving business
- Secondly, a company’s directors may comment on the company’s solvency while an auditor assesses the organization as a going concern. However, investors and company prospects must not take these at face value to make financial decisions. Neither should these reasons cause panic about a company’s factors
- Thirdly, readers must know that a statutory audit is not an investigation that reveals fraud and malpractices. On the other hand, an audit may detect instances of fraud that result in material misstatements. The reason is that auditors treat fraud risk seriously & accordingly test the auditor’s internal controls. Nonetheless, it still does not guarantee the detection of material fraud
- Lastly, if readers understand an audit report correctly, they will benefit immensely. They need to pay attention to the scope & opinion sections of the report, along with the sections that describe the responsibilities of the auditors and management
FAQs: Understanding an Audit Report
Know More About Audit Reports
- What are the minimal elements of an audit report?
Following are the basic elements of an audit report are as follows:
a) A title
b) An addressee
c) An opinion section
d) Basis of opinion
e) Going concerned
f) Key audit matters
g) A description of management’s responsibilities
h) A description of the auditor’s responsibilities
i) Other reporting responsibilities
j) The auditor’s signature and his address
k) Place of signature
l) The audit report’s date
- What is the difference between a modified report and an unmodified report?
An unmodified report is one that doesn’t require any changes in the financial statement. According to this report, the company’s finances are true and fair. In this case, an auditor gives an unqualified opinion, which suggests that no changes are required.
Further, in a modified report, the entity needs to make changes in its financial statement as per the opinion provided by the auditor. The qualified opinion, adverse opinion, as well as disclaimer of opinion come under this section. Consequently, in this case, the company’s financial statement cannot be considered true and fair.
We are working as a profound audit firm providing audit and assurance services for a long time and have absorbed the changes taking place with time. We always make sure that we follow auditing standards while auditing, as well as preparing the audit report. Our audit team is highly efficient with skilled professionals who have conducted auditing in different industries for medium as well as large scale businesses.
We know about the responsibility we hold while conducting an audit. According to the audit report, investors and stakeholders take their decision. Therefore, we prepare a completely independent and uninfluenced report compliant with the auditing norms and fulfill the legal requirements.
Besides external audits, we also conduct forensic audits, internal audits, financial statement audits, etc, making us one of the best audit firms in UAE.