Meaning and definition of Audit Report

Audit report, as recorded in the annual report, examines to check the

compliance of a companys financial statements with GAAP. The audit report is,
sometimes, also referred as the clean opinion. An audit report includes three
paragraphs the first stating the responsibilities of the auditor and directors; the
second stating the use of GAAP; and finally the third paragraph stating the
auditors opinion.
An audit report is, therefore, an official evaluation of an organizations financial
status, in combination with the opinion of the auditor and collected data on the
companys financial transactions and situation. This is a general process for
companies it use while evaluating their records and providing financial info to
present as well as future investors.
Constituents of Audit Report
It is important to know about what is contained in an audit report. Besides, it is
also important for the auditor to examine the financial statements of a company
prior to issuing the audit report. These financial statements are required to be
presented fairly in terms of cash flows, results of operations, and financial status
in compliance with GAAP.
In addition to the letterhead of the auditing firm, the key elements included in
an audit report are as follows:

a title indicative of the word independent,

that the financial statement, which is the subject of the report, was
audited,

a statement stating that the financial statements are a responsibility of the

management and the auditor is just giving his opinion,

the audit was created in line with the generally accepted auditing
standards,

a statement that the auditor planned and accomplished the audit

In addition to the aforesaid constituents, an audit report must feature a

declaration that the auditor believes that there is a reasonable basis for the
opinion. Also, it should state an opinion that the financial statements are
presented fairly in all material aspects. Moreover, in the closing part, the report
should essentially contain the signature of the auditors firm, either manually or
printed form, and the date on which the audit report was created.

IMPORTANCE OF AUDIT SYSTEM TO THE COMPANIES

Auditing is a means of evaluating the
effectiveness of a company's internal controls.
Maintaining
internal
business
operations,

an

effective

system

of

controls is vital for achieving a company's

objectives, obtaining reliable financial reporting on its
preventing fraud and misappropriation of its assets, and

minimizing its cost of capital. Both internal and independent auditors contribute
to a company's audit system in different but important ways.
Business Objectives
Having an effective audit system is important for a company because it enables
it to pursue and attain its various corporate objectives. Business processes need
various forms of internal control to facilitate supervision and monitoring,
prevent and detect irregular transactions, measure ongoing performance,
maintain adequate business records and to promote operational productivity.
Internal auditors review the design of the internal controls and informally
propose improvements, and document any material irregularities to enable
further investigation by management if it is warranted under the circumstances.
Risk of Misstatement
Auditors assess the risk of material misstatement in a company's financial
reports. Without a system of internal controls or an audit system, a company
would not be able to create reliable financial reports for internal or external
purposes. Thus, it would not be able to determine how to allocate its resources
and would be unable to know which of its segments or product lines are
profitable and which are not. Additionally, it could not manage its affairs, as it

would not have the ability to tell the status of its assets and liabilities and would
be rendered undependable in the marketplace due to its inability to consistently
produce its goods and services in a reliable fashion. Accordingly, an audit
system is crucial in preventing debilitating misstatements in a company's
records and reports.
Related Reading:
Fraud Prevention
Internal audit serves an important role for companies in fraud prevention.
Recurring analysis of a company's operations and maintaining rigorous systems
of internal controls can prevent and detect various forms of fraud and other
accounting irregularities. Audit professionals assist in the design and
modification of internal control systems the purpose of which includes, among
other things, fraud prevention. An important part of prevention can be
deterrence, and if a company is known to have an active and diligent audit
system in place, by reputation alone it may prevent an employee or vendor from
attempting a scheme to defraud the company.
Cost of Capital
The cost of capital is important for every company, regardless of its size. Cost
of capital is largely comprised of the risk associated with an investment, and if
an investment has more risk, an investor will require a higher rate of return to
invest. Strong audit systems can reduce various forms of risk in an enterprise,
including its information risk (the risk of material misstatement in financial
reporting), the risk of fraud and misappropriation of assets, as well the risk of
suboptimal management due to insufficient information on its operations.

HOW TO PREPARE AN AUDIT REPORT?

An audit report is a report by an auditor on the company's financial
statement. The audit report states whether the company's financial
statements are presented fairly. An unqualified report means the financial
statements are presented fairly. A qualified opinion means the company
presented the financial statements fairly, except for any irregularity the auditor
finds. An adverse reports means the company did not present the financial
statements fairly with the generally accepted accounting principals. A disclaimer
opinion means the company did not present the financial statements fairly with
the generally accepted accounting standards.
Step 1
Write the format of the letter. The title must include the word "independent" in it
to denote that the auditor is an independent auditor. In addition, address the
letter to the person you are writing the letter. This person is usually an owner of
the company or the company's board of directors. The form name and the
date of the report must also appear on the audit report.
Step 2
Write the introduction paragraph, which contains that the financial statements
were audited. The introduction must also express that the financial statements
are the managers responsibility and that the auditors job is only to give an
opinion on the financial statement.
Step 3
Write the scope paragraph, which includes the financial statements were audited
under the Generally Accepted Accounting Standards. The paragraph must also

include that the auditor conducted the audit to find assurance there are no
material misstatements on the financial statements. The auditor must also
disclose the audit assessed the management

accounting principles by

conducting tests to sort through evidence.

Step 4
Write the opinion paragraph, which states the auditors opinion on the financial
statements that the auditor referenced in the introduction paragraph.