An Auditor’s Report: What Is It?
A written letter from the auditor expressing their judgment on whether the financial statements of a firm are free from substantial misrepresentation and conform to generally accepted accounting principles (GAAP) is called an auditor’s report.
Usually, the company’s annual report is released along with the independent and external audit reports. Because banks and creditors want to audit a company’s financial accounts before making a loan, the auditor’s report holds significant value.
The Function of an Auditor’s Report
A written letter that provides an opinion on a firm’s conformity with conventional accounting standards and is connected to the financial statements of the company is called an auditor’s report. When a public firm reports its results to the Securities and Exchange Commission (SEC), the auditor’s report must be included with the financial statements.
An auditor’s report, however, does not assess a company’s suitability as an investment. Furthermore, a review of the company’s profit performance at the time is not included in the audit report. Instead, the information serves just as a gauge for the accuracy of the financial accounts.
The Elements Found in an Audit Report
Generally recognized auditing standards (GAAS) have developed a typical structure for the auditor’s letter. Typically, a report has three paragraphs.
- The duties of the directors and the auditor are outlined in the first paragraph.
- The scope is stated in the second paragraph, which also states that the handbook was a collection of conventional accounting procedures.
- The auditor’s view is given in the third paragraph.
The investor could be informed of the findings of a different audit on one of the entity’s functions in a separate paragraph. The viewpoint is expressed in the third paragraph, where the investor will focus.
The auditor’s conclusions will determine the kind of report that is published. These are the most typical report formats that businesses get.
Unqualified or Clean Report
A clean report indicates that there have been no substantial misstatements made in the company’s financial records and that they have complied with GAAP. Most audits result in clear or unqualified opinions.
With a qualified opinion, one of two things can happen: either the financial statements have material errors that are not widespread, or the auditor can not find enough relevant audit evidence to support an idea, even though the possible effects of material errors are not likely to happen. For instance, there may have been an error in the profit or operating expenditure calculation. Usually, auditors identify the precise causes and locations of the problems so the business may address them.
If the auditor issues an unfavorable opinion, it indicates that they have gathered enough audit evidence to determine severe and widespread misstatements in the financial accounts. The worst thing that can happen to a business is an unfavorable impression, which, if it isn’t changed, can have long-term effects and legal implications. Following an adverse audit report, regulators and investors will reject a company’s financial statements. Corporate officials may also be charged with crimes if there is evidence of improper activities.
Retraction of Opinion
A disclaimer of opinion indicates that the auditor could not gather enough audit evidence to support the view and that any undiscovered misstatements may have substantial and widespread consequences for the financial statements. Examples include situations where an auditor cannot act impartially or is denied access to specific financial data.
An Auditor’s Report Sample
The following are quotes from the Deloitte & Touche LLP audit report for Starbucks Corporation, released on November 15, 2019.
First Paragraph: Views Regarding the Financial Statements
- “We have audited the related consolidated statements of earnings, comprehensive income, equity, and cash flows for each of the three years in the period ended September 29, 2019, as well as the related notes (collectively referred to as the ‘financial statements’).” Starbucks Corporation and subsidiaries (the ‘Company’) as of September 29, 2019, and September 30, 2018, as well as the related consolidated balance sheets.
- We believe that the financial statements accurately depict the company’s financial position as of September 29, 2019, and September 30, 2018, as well as the operating and cash flow results for each of the three years in the period ending September 29, 2019, by generally accepted accounting principles in the United States of America.
- Opinion Basis: “We followed the Public Company Accounting Oversight Board’s (PCAOB) guidelines while conducting our audits. Based on these standards, we need to plan and carry out the audit to ensure that the financial statements do not contain any material misrepresentations, whether these are due to fraud or mistake. As part of our audits, we evaluated the likelihood of a substantial misrepresentation of the financial statements—whether due to fraud or error—and carried out measures to address that risk.
- Examining evidence about the quantities and disclosures in the financial statements on a test basis was one of these techniques. In addition, as part of our audits, we assessed the financial statements’ general presentation and the application of significant management estimates and accounting rules. We think our assessment has a solid foundation thanks to our audits.”
- The auditor’s opinion about whether a company’s financial statements adhere to GAAP and are free from substantial misstatement is expressed in the auditor’s report.
- Because banks, creditors, and regulators mandate an audit of a company’s financial accounts, the audit report is essential.
- An unqualified audit report indicates problems, but a clean audit report indicates the organization complied with accounting requirements.
- An unfavorable report indicates the possibility of misstatements, inconsistencies, and non-GAAP compliance in the financial statements.
- “Topic 4: Independent Accountants’ Involvement,” U.S. Securities and Exchange Commission.