Audit reports are a crucial and necessary aspect of running any organisation, and are an important process to understand.
The goal of an audit report is to document that a company’s financial statements are free from error, and they matter greatly for the success of your organisation.
What Is An Audit Report?
An audit report is a document that serves as a summary of an organisation's financial status. It is prepared by an auditor, who is a financial professional that observes a company to determine the assets and liabilities present in their finances.
This document provides a detailed overview of a company's financial standing, as well as an auditor's professional assessment of the finances. It is then released to the public for information purposes. Companies may opt to have an audit done for their own reasons, such as uncovering areas of improvement or to attract potential investors.
Auditors compare an organisation’s fiscal practices to the GAAP, or Generally Accepting Accounting Principles, to ensure that all companies are held to the same standards.
Audit reports are a great asset to organisations, as they provide a detailed analysis as well as a professional judgement of its financial standing to investors.
An audit report can yield four types of results for a company, depending on the state of their finances, and in this article we will define these four types of audit reports and their implications.
Different Types Of Audit Reports
An auditor’s opinion report is the document attached to the statutory audit report that establishes their perspective of the audit. There are four types of reports:
1. Unqualified Opinion
An Unqualified Opinion is also considered a Clean Report, which shows that the auditors are satisfied with the organisation’s financial performance.
It establishes that they found no issues with the company’s financial reports or operations, and the company is in full compliance with GAAP guidelines.
This means that the auditors determined that no changes need to be made to the organisation's finances. When this report is made available to the public, it will be seen as a positive sign for the company by investors and other stakeholders.
2. Qualified Opinion
If there is a specific process or transaction within the organisation that an auditor isn’t confident about, that may prevent them from issuing an unqualified report. Instead they may issue a Qualified Opinion.
When Auditors write up a qualified opinion, they state the reasons the company has not achieved a clean report. For example, if the organisation’s financial reporting does not comply with GAAP guidelines, auditors will give a qualified report.
This report demonstrates the areas where a company needs to make advances in order to meet the standards for proper financial reporting. It also helps organisations pinpoint areas of deficiency in order to enhance their financial standing.
A qualified opinion is seen as a red flag for investors and may cause them to avoid investing in the company.
3. Disclaimer of Opinion
When an auditor issues a Disclaimer Of Opinion report, they are distancing themselves from providing any opinion related to the financial standing of the organisation.
A company must allow the auditors access to their complete financial records for an effective auditing process, without any restraints. If an auditor is not given sufficient access or satisfactory answers to their questions during an audit, they may issue a disclaimer report.
This may occur if the auditor is not allowed to inspect an organisation's procedures, in which case they may feel unable to form a solid opinion and give a disclaimer.
A disclaimer of opinion is a very harsh stance and as a result, it creates an incredibly unfavourable image of the company that is reported on.
4. Adverse Opinion
An Adverse Opinion usually indicates that the financial reports of the organisations contain gross misstatements and irregularities and have the potential for fraud.
Auditors who aren’t satisfied with the financial statements or who discover a high level of misstatements will issue an adverse audit report.
Adverse opinions are a warning sign that the company's financial reports do not follow GAAP, and this is taken very seriously by financial institutions and investors, who will refuse to engage in any kind of business with said company.
What Does An Auditor Do During An Audit?
Depending on the size of the organisation, an auditor can work alone or in a team to ensure that the auditing process is effective and all-encompassing. The organisation’s management will submit all the financial records available to the auditing team to start.
The auditor will examine the company’s data collection and recording processes, evaluating it against GAAP's regulations. The results of this examination allows the auditor to form an impartial opinion on the organisation's financial standing.
Companies that have annual audits demonstrate transparency in their financial reporting, which gains them credibility and a positive reputation amongst other organisations and investors.
Structure Of An Audit Report
Most audit reports carry the same structure, and the body of the report is separated into sections, defining the auditor’s responsibility, their opinion and then the basis for said opinion.
The auditor’s responsibility is a statement explaining their obligation of auditing the organisation’s financial status by law. This part of the report establishes that the auditor’s opinion is unbiased and free of personal agendas, and that they will perform the audit to the best of their ability
The auditor’s opinion outlines their view of the organisation’s financial standing from their findings, and states whether the report is unqualified, qualified, disclaimer or adverse, and if it has followed GAAP standards.
They will then share how they came to this conclusion, the different assessments that were undertaken to reach this conclusion and a general explanation of the audit. They can also include areas that require improvement and any other recommendations to help the company.
Auditors are responsible for ensuring that companies are demonstrating transparency, reliability and accountability, and audit reports push organisations to adhere to financial reporting standards, as well as other standards like ESG. Unqualified reports are highly valued by companies, investors and the general public.
In order to ensure your organisation can achieve that crucial unqualified report, you will need efficient and effective management of your audit process, especially in this digital age.
This is where Convene comes in.
Our Award Winning Board Portal software includes a built-in Audit Trail, so you can be sure you are compliant with all regulations and can establish a strong admin trail.
Our comprehensive software was designed to streamline communication and improve your administrative processes, ensuring that your organisation can run as smoothly as possible.
To find out more about how Convene can help your organisation, read our customer success stories here or book a demo today.