Auditor's report – What is an auditor's report?
An auditor's report provides an opinion on the validity and reliability of a company’s financial statements
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When financial statements are finalised, they usually must contain an evaluation – an auditor's report - from a licensed accountant or auditor. This report provides an overview of the evaluation of the validity and reliability of a company or organization’s financial statements.
The goal of an auditor's report is to document reasonable assurance that a company’s financial statements are free from error.
Preparation of the report
An audit of a company’s financial statements should result in a report wherein the accountant or auditor is free to share their opinion about the validity and reliability of a company’s financial statements.
In this report, the auditor should provide an accurate picture of the company and their financial statements. The auditor should also state whether they are externally or internally connected to the company.
Within the report, the auditor can share any reservations about the condition of the company’s finances or relevant additional information. Reservations could arise if the auditor disagrees with something found in the financial statements, e.g. if the auditor disagrees with management about the valuation of an asset because they believe that this has a more significant impact on the financial statements.
In the report
There are rules concerning what an auditor's report should include and the order in which various items should be reported.
Auditor's reports must adhere to accepted standards established by governing bodies. Standards such as those set by the UK Generally Accepted Accounting Practice (UK GAAP) help to assure external users that the auditor's opinion on the fairness of financial statements is based on a commonly accepted framework.
A typical auditor's report will state:
- The company that has been audited and what their accounting method is
- The responsibility of the auditor and their report
- Reservations (if any)
- Any additional information*
- A management report*
- The date and auditor’s signature
*Note: Items 5 and 6 are omitted if there is no additional information and/or if management has chosen not to prepare a management report. Management reports are not required, but if one is listed in the financial statements, the auditor should ensure that it is consistent with rest of the financial documentation.
Four types of reports
You may have seen mention of a particular type of audit report. The three main types are:
- The clean or unqualified opinion. This report indicates the auditor’s opinion that all documents provided for the evaluation indicate that the company’s financial activities and records are correct and acceptable.
This report shows that a business has followed the necessary practices and adhered to conditions set about by the UK GAAP. This is the best type of report a company can receive.
- The qualified opinion. This report is generally positive because it indicates that the auditor has found nothing wrong in the financial documentation. However, a qualified opinion means that the company audited has not adhered to the standards set by UK GAAP.
This report will include an extra section addressing why it could not be considered an unqualified opinion.
- The adverse opinion. Hopefully never a report you will have to face as it is the worst type to receive following an audit. An adverse opinion means that the company has not adhered to the standards set by the UK GAAP and that auditor has discovered discrepancies in the company’s financial statements.
While this can result from a mistake in the auditing process, it can also be an indication of fraud within the company. An adverse opinion means the company must go through their documentation before being audited a second time.
There is a fourth, less common report known as the disclaimer of opinion. This simply means that the auditor wasn’t able to complete the audit due to a particular reason.
Auditor’s reports and your accounts
The best way to ensure an unqualified opinion, should your company be subject to an audit, is to keep track of your company’s finances. This means ensuring your bank account is reconciled with your income and expenses, as well as keeping track of liabilities and assets. Debitoor has automatic bank reconciliation, making it easy to keep your accounts up to date.