Auditor's report
An auditor's report is a formal opinion, or disclaimer thereof, issued by either an internal auditor or an independent external auditor as a result of an internal or external audit, as an assurance service in order for the user to make decisions based on the results of the audit.
Auditor's reports are considered essential tools when reporting financial information to users, particularly in business. Many third-party users prefer, or even require financial information to be certified by an independent external auditor. Audit reports derive value from increasing the credibility of financial statements, which subsequently increases investors' reliance on them. In the government, legislative and anti-corruption entities use audit reports to keep track of the actions of public administrators on behalf of citizens. Therefore auditing reports are a check mechanism on behalf of the citizen, to ensure that public finances, resources and trust are managed in entities created to foster good governance, such as local authorities, government departments, ministries and related government bodies.
Auditor's report on financial statements
It is important to note that auditor reports on financial statements are neither evaluations nor any other similar determination used to evaluate entities in order to make a decision. The report is only an opinion on whether the information presented is correct and free from material misstatements, whereas all other determinations are left for the user to decide.There are four common types of auditor's reports, each one presenting a different situation encountered during the auditor's work. The four reports are as follows:
Unqualified Opinion
An opinion is said to be unqualified when he or she does not have any significant reservation in respect of matters contained in the Financial Statements. The most frequent type of report is referred to as the "Unqualified Opinion", and is regarded by many as the equivalent of a "clean bill of health" to a patient, which has led many to call it the "Clean Opinion", but in reality it is not a clean bill of health, because the Auditor can only provide reasonable assurance regarding the Financial Statements, not the health of the company itself, or the integrity of company records not part of the foundation of the Financial Statements. This type of report is issued by an auditor when the financial statements are free of material misstatements and are presented fairly in accordance with the Generally Accepted Accounting Principles, which in other words means that the company's financial condition, position, and operations are fairly presented in the financial statements. It is the best type of report an auditee may receive from an external auditor.An Unqualified Opinion indicates the following –
The Financial Statements have been prepared using the Generally Accepted Accounting Principles which have been consistently applied;
The Financial Statements comply with relevant statutory requirements and regulations;
There is adequate disclosure of all material matters relevant to the proper presentation of the financial information subject to statutory requirements, where applicable;
Any changes in the accounting principles or in the method of their application and the effects there of have been properly determined and disclosed in the Financial Statements.
The report consists of a title and header, a main body, the auditor's signature and address, and the report's issuance date. US auditing standards require that the title includes "independent" to convey to the user that the report was unbiased in all respects. Traditionally, the main body of the unqualified report consists of three main paragraphs, each with distinct standard wording and individual purpose. Nonetheless, certain auditors have since modified the arrangement of the main body in order to differentiate themselves from other audit firms, even though such modification is contrary to the clarified US AICPA standards on auditing.
The first paragraph states the audit work performed and identifies the responsibilities of the auditor and the auditee in relation to the financial statements. The second paragraph details the scope of audit work, provides a general description of the nature of the work, examples of procedures performed, and any limitations the audit faced based on the nature of the work. This paragraph also states that the audit was performed in accordance with the country's prevailing generally accepted auditing standards and regulations. The third paragraph simply states the auditor's opinion on the financial statements and whether they are in accordance with generally accepted accounting principles.
The following is an example of a standard unqualified auditor's report on financial statements as it is used in most countries, using the name ABC Company as an auditee's name. Note that this report is acceptable only for periods ending before December 15, 2012:
INDEPENDENT AUDITOR'S REPORT
Board of Directors, Stockholders, Owners, and/or Management of
ABC Company, Inc.
123 Main St.
Anytown, Any Country
We have audited the accompanying balance sheet of ABC Company, Inc. as of December 31, 20XX and the related statements of income, retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20XX, and the results of its operations and its cash flows for the year then ended in accordance with generally accepted accounting principles in.
AUDITOR'S SIGNATURE
Auditor's name and address
Date = Last day of any significant field work
This date should not be dated earlier than when the auditor has sufficient audit evidence to support the opinion.
Recently modifications have been made by the PCAOB to the opinion in the independent auditors report. These changes can be attributed to the introduction of SAS No. 122 and SAS No. 123. For periods ending after December 15, 2012, the following is an example of a standard unqualified auditor's report on financial statements as it is used in most countries, using the name ABC Company, which was incorporated in California, as an auditee's name:
INDEPENDENT AUDITOR'S REPORT
Board of Directors, Stockholders, Owners, and/or Management of
ABC Company, Inc.
123 Main St.
Anytown, Any Country
We have audited the accompanying financial statements of ABC Company, Inc., which comprise the balance sheet as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows for the year then ended, and the related notes to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company, Inc. as of December 31, 20XX, and the results of its operations and its cash flows for the year then ended in accordance with U.S. generally accepted accounting principles.
AUDITOR'S SIGNATURE
Auditor's name and address
Date = Last day of any significant field work
This date should not be dated earlier than when the auditor has sufficient audit evidence to support the opinion.