Chapter 15 – Auditor’s Report

by • 27/08/2011 • B.com part 2 AuditingComments (0)647

Audit Report

Auditor’s report is the expert’s opinion expressed by the auditor as to the fairness of financial statements.

The audit report is the end product of every audit. It is the medium through which an auditor expresses his opinion on the financial statements. Audit report is an important part of audit process since it summarize the results of the examination work conducted by the auditor. The report shows the scope of the work done and the responsibility assumed by the auditor regarding the fairness or otherwise of hte financial statements. The auditor draws appropriate conclusions by examining the various statements and accounts, which he conveys through the audit report. It is a formal communication by the auditor to the shareholders throwing light on the state of affairs of the company. Audit report is addressed to the members of the company and is considered at the Annual General meeting of the company. Audit reports should be so drafted that they remain simple and intelligible to a common man. The audit report should be explicit so as to provide greater information and protection to the interest of shareholders and others.

Essentials of Audit Report

1. Title

An auditor report must have appropriate title, such as “Auditor’s Report”. It is helpful for the reader to identify the auditor’s report. It is easy to distinguish it from other reports. The management can issue any report about the business performance. The title o the report is essential.

2. Addressee

The addressee may be shareholder or board of director of a company. The auditor can audit financial statements of any business unit as per agreement. The report should be appropriately addressed as required by engagement letter and legal requirements. The report is usually addresses to the shareholders or the board of directors.


3. Identification

The audit report should identify the financial statement that have audited. The financial statement may include trading profit and loss accounts, balance sheet and statement of changes in financial position and sources and application of frauds statement. The report should include the name of the entity. Moreover the data and period covered by the financial statement are also stated in it.


4. Reference to Auditing Standards

The audit report should indicate the auditing standard or practice followed in conducting the audit. The international auditing guidelines need assurance that the audit has been conducted as per set standards.


5. Opinion

The auditor’s report should clearly state the auditor’s opinion on the presentation in the financial statement of the entity’s financial position and the result of its operations. The statement give a true and fair view is an auditor’s opinion. This opinion is usually based on national standard or international accounting standards.


6. Signature

The audit report should be signed in the name of the audit firm, the personal name of the auditor or both as appropriate.


7. Auditor’s Address

The address of auditor is stated in the audit report. The name of city is stated in the report for information of the readers.


8. Date of Report

The report should be dated. It informs the reader that the auditor considered the effect on the financial statements and in his report of events or transactions about which he become aware the occurred up to that date.

Qualified Report

A qualified opinion is given when the auditor fells the he cannot issue an unqualified opinion. The effect of disagreement or limitation on scope is not so material as to require an advance opinion or a disclaimer of opinion. A qualified opinion should be expressed as being except to the effects of the matter to which the qualification relates.


1. No Proper Books

A qualified repeat is issued when proper books of accounts have not kept by the business concern. The law estates the number of books to be maintained by the companies by the companies. The failure to keep necessary books of accounts induces the auditor to mention the fact in the reports.


2. Informal Statement

The law states the formal for financial statement. The fourth schedule and fifth are given in the companies ordinance 1984. The companies must prepare their statement according to schedule otherwise the auditor can mention weakness in the report.


3. Disagreement Between Books and Statements

The financial statement figures must tally with figures recorded in journal and ledgers. The different in figures is not acceptable as it may lead to receive the shareholders. The auditor can qualified his report that figures of books and statement are different.


4. Inconsistent Accounting Policies

The accounting policies must remain the same from year to year. The changes in depreciation rate valuation of stock and provision for bad debts can disturb the financial statements. The auditor can state the inconsistency in accounting policies toward by the management.


5. Ultra Vires Payments

The management can misuse the power of doing the business. They may not followed articles of association or companies ordinance 1984. The payment of dividend out of capital is an example. The auditor must report to the shareholders about the misuse of powers.


6. Expenditure Incurred

The expenditure incurred during the year must be to the purpose of business of company. The expenses incurred objective may be state by the auditor in the report. The management is responsible to these wrong payments.


7. Business Conducted

The business conducted investment made and the expenditure incurred during the year may not meet the requirement of memorandum of association, articles of association and the companies ordinance. The auditor can inform the owners about the violation of law.


8. Scope Limitations

The management may have valued closing stock prior to date of appointment of auditors. There is a scope limitation as auditor was absence at the time of stock valuatio. The auditor can qualify his report as to the valuation of stack talking.


9. In Appropriate Accounting Method

The auditor may note that depreciation has not been charged on building. The depreciated on plant and machinery may be recorded at fewer rates. The difference in actual and recorded expenses may be stated in the report.


10. Inadequate disclosure

The management may have entered in to an agreement for issue of debentures for plant and expansion. The agreement may restrict the right to pay dividend to shareholders for next years. The auditor can disclose such agreement to the owners of the company.


11. Departure from Accounting Practice

The qualified report is issued when an auditor is not satisfied with the management policies. The company may not record the provision for loss on long-term contract. The disagreement with management can be recorded as adverse opinion in the report for the information.


12. Breakdown of Accounting System

The auditor can issue the qualified report when he is unable to form an opinion about the financial statements. There may be fire at computer center business office. The figures may be estimated so auditor can disclaim his opinion.


13. Failure To Prove Case Sales

The auditor can check the internal control system. The company may be dealing on cash basis. All sales may be in terms of cash. The poor internal control system may create hurdle to verify cash sales. The auditor can submit qualified report with out opinion.


14. Contingency

The auditor may qualify his report where there is contingency (tax dispute court case) which is significant to affect the financial statement of the company. The auditor has the right to report the matter to the shareholders. The items must be stated in the footnote as well as audit report.


15. No Zakat Deduction

The Zakat may be deductible at sources under the Zakat and usher ordinance 1980. The auditor may examine the relevant law. He can not the weakness of the management for deduction of Zakat. This weakness may be present in the audit report.


16. Incomplete Information

The auditor may not obtain complete and full information and explanation for the purpose of audit. The facts can be presented to the owners that he is unable to collect necessary information. He can submit qualified report in order to draw attention. He can submit qualified report in order to draw attention of owners.


17. No Access to Books

The auditor may be refused to have access to the books of accounts and other relevant record. In this case the auditor is unable to collect true information necessary for the purpose of audit. The qualified report can be presented to the shareholder due to non-availability of all or any book.

Auditor’s Duties in Respect of Statutory Report

1. Statutory Report

The report, which is submitted by the directors in the first general meeting of the shareholders is called statutory report. The auditors should duly verify it. The auditor will take following important steps before certifying the statutory report.


2. Study of Legal Documents

The company Memorandum and Articles as also the prospectus should be carefully studied and notes should be made of items affecting terms of share capital issue, minimum subscription, brokerage on shares or underwriting commission, acquisition of assets and liabilities from vendors, mode of satisfaction of purchase consideration etc.


3. Checking of Shares

A complete and exhaustive audit should be made of share capital and debentures issue, including checking of entries in the Register of members and he Register of Debenture holders.


4. Checking of Cash in Hand and Cash at Bank

In order to ascertain the correct balance of cash in hand and in bank, it would be necessary to include in the checking the revenue receipts and payments also.


5. Verify the Capital Receipts and Payments

A through vouching and checking of the cash book transactions for the purpose of verifying the capital receipts and payments will be necessary.


6. Checking of Commission

Auditor should check all types of commission paid or unpaid with the issue or sale of debentures to any one.


7. Verify the Borrowing Power

It should be seen that the limit, if any placed on the borrowing powers of the company is not exceeded.


8. Verify the Minimum Subscription

The auditor should ascertain that the requirements of the law as to minimum subscription have been duly complied with.


9. Checking of Bio Data

Auditor should also verify the names, addresses and descriptions of the directors manages agents and auditors.


10. Verify the Arrears

Auditor should verify the arrears due on calls from directors, managers and agents etc.


11. Scrutiny

Auditor should examine very carefully all the items, which are included in the preliminary expenses account.


12. Checking of Minutes

Director’s minutes will have to be referred to in order to see that the allotment of shares and debentures is properly done and that all capital expenditure and loans borrowed are duly sanctioned.


13. Examine the Passbook

Auditor should examine the bank passbook and verify the receipts and payment with it.


14. Specimen of Auditor’s Certificate

If the undersigned being the auditor of the company, hereby certify that so much of the report are relates to the shares allotted by the company and the cash received in respect of such shares and receipts and the payments of the company is correct.

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