Auditing of Financial Statements - Essay Example

Audit Reports Introduction Audit reports do not merely bring out the results of auditing of financial ments or other type of examinations, but these reports also provide opportunities for auditors to express opinion on such audit examinations. This write up conveys the meaning of audit reports. It also provides the actual objectives of such reporting as well as the effectiveness of audit opinion conveyed through audit reports. Meaning of Audit Reports Audit report is basically the submission of auditors of an audit conducted by them. It is usually in a form approved by accounting professional bodies. Audit Report on financial statements of an entity is normally an independent auditor's report. Internal auditors also submit reports on assessment of internal controls installed by entities voluntarily or as statutory compliances. Audit report carries the results of audit examination conducted with in a framework in shape of opinion formed by auditors on such audit examinations. Auditing opinions formed and conveyed through audit reporting may be classified into four categories, namely an unqualified opinion, a qualified opinion, adverse Opinion, and disclaimer of an opinion. Unqualified Opinion expresses that financial statements are presented in accordance with requirement of GAAP. A qualified opinion conveys that financial statements present the financial position, financial results, and cash flow of the entity of the prescribed period in accordance with GAAP except for the matter or matters on which the report is qualified. Adverse Opinion on an audit report is provided when the financial statements do not present financial position, financial results and cash flows in accordance with applicable GAAP. Reports containing adverse opinion are issued when there are material departures from applicable GAAP in the presentations of financial statements. Some time an auditor is not in a position to form an opinion on the financial statement presentations. Under such circumstances the auditor avoids issuing an opinion on financial statements, and that is called disclaimer of an opinion. Such a situation arises normally when the auditor is not independent in forming an opinion; or there exists some material that limits the scope of auditing; or there exists a significant uncertainty hampering the formation of an opinion. Objectives of Audit Reports Audit reports are medium of communication of results and findings of an examination or audit conducted under certain established framework. Under financial audit reporting auditor is concerned with forming an opinion on the financial statements and therefore independent audit report becomes an important medium for communicating that opinion to the shareholders or to the owners of the entity. This opinion of the auditor serves a variety of objectives of the audit function undertaken voluntarily or as compliance of a legal requirement. Some of these objectives are stated as under: Audit reports coveys the misstatements or deficiencies in the compiled financial statements showing the performance for a fiscal period and financial status on a particular date of an entity. That is to say the objective of audit reporting is to bring those deficiencies to the fore for the observance of the users of financial statements and helping them in taking their investing or other decisions respecting the entity involved. Audits are undertaken to bring improvement and fairness in reporting the results of operations to the shareholders or owners of the entity. Audit report, being the final function of auditing, is a tool to highlight the areas needing specific attention of the management for the improvement so that true and fair financial statements are presented to the users of such financial statements. Audit report serves variety of management and operational objectives as well.'A variety of individuals will use audit reports for a variety of purposes. Executive management will typically use an audit report to gain an insight to the overall status of internal controls within a given business area and for the organization as a whole. Operational management uses audit reports to determine the adequacy and effectiveness of specific controls in achieving specific performance and control objectives. Other agencies may use audit reports to gain insight into the inner working of specific operations and the degree of reliance that can be placed on the outputs of those business areas.'(Richard Cascarino. Page 134)i Audit report explains the audit objectives, plans, and scope of audit activities that has been undertaken to arrive at the opinion formed by the auditor. Even the methodologies and evidences used for auditing procedures are brought to the fore helping users of financial statements to limit their observances of financial statements accordingly. Audit report conveys attributes like criteria of audit, conditions of audit, causes and effects of audit procedures, and finally the recommendations on the basis of audit results achieved. The objective of such presentation is to make 'the audit report a base from which to present audit issues and enables auditors to compare what should be (the criteria) to what is (the condition).'(Larry D Hubbard, Dec. 2001)ii Audit report provides highest level of assurance to those interested in financial information of an entity. In a way the objective of audit report is to add creditability to the attestation performed by auditor to an assertion of the financial statements prepared by the management of an entity. An audit report serves the objectivity to improve the method of conducting future projects by pointing deficiencies in the conduct of the present project. Effectiveness of audit reports Effects of audit reports are far reaching. Quoting Richard Flek APB Chairman, Philip Smith (1 September 2008)iii states that 'APB believes that it can most effectively influence international decisions on the auditor's report by moving to implement a concise auditor's report and commencing research to better understand what can realistically be done to make auditor's report more informative.' Whatever may be the indirect effects of audit reports, the direct effects of communication of an opinion cannot be ignored. The audit opinions on financial statements some times create such an impact and influence that companies have to find means in advance to counter those effects. William T. Bailey (page 882)iv has opined after studying four types of hypothesis of audit reporting (two concerning the source of specific financial- statement messages and two other on effects of audit reports) that 'the auditors are perceived to be much more involved in the communication of financial- statement messages. This perceived involvement and the information that audit report convey about the auditor's credibility combine to produce some unsuspected credibility effects.' It has been tested umpteen times that a qualified opinion aired in an audit report impacts directly the capital market. That is why in case of a company that has not published a qualified opinion before, investors normally assess the probability of a qualification being given as close to zero. But the mere expectation of a release of qualified report may lead investors to revise their perceptions on the audit qualification being given. Investors start scrutinizing and revising future deals. Such is the immediate impact or effect of qualifications in the report. In fact negative or qualified opinions have far reaching consequences from the point of achieving any entity's objectives. For example a company whose financial statements are qualified with a negative opinion will have fewer possibilities in obtaining a bank loan or other facilities. Similarly investors will also shy away from putting their money into companies with adverse or quailed audit opinions on their financial statements. That is why Debra R. Sheldon (page 66)v considers the influence of audit reports emphatic because'they provide an assurance that the organization is healthy and that resources are being utilized reasonably.' Firms are often compared in an industry on the basis of each firm's specific treatment of a common problem in the industry. Audit reports of these firms provide the results of such treatments and help in making comparisons to encourage healthy competition in the industry. Above all audit reports often become a need analysis for training. Often organizations develop training programmes to overcome difficulties of operations. Information included in audit reports provides exceptional substance for the development of formal training programmes for the employees. Therefore it can be said that audit reports are effectively informative. Word Count: 1454 References Read More