Explain your audit report and the various audit opinions

Whether you are required by law to carry out a statutory audit or have been requested by directors, trustees or share­holders to carry out a non-statutory audit, the results may have a signif­icant impact on the business. There is no doubt that there is a lot of infor­mation to process from an independent auditor’s report, but it is important that you under­stand the comments and any recom­men­da­tions so that you can improve or resolve internal proce­dures and safeguards, as well as maintain legal compliance and adhere to company gover­nance. The article explains the different types of audit reports, how to under­stand your audit report, and what might need to be done afterward based on the auditor’s opinion.

What is an auditor’s report?

An auditor’s report is an external, third-party assessment of whether a company has conducted its financial reporting accurately and in accor­dance with the financial reports Generally Accepted Accounting Principles (GAAP). Its purpose is to provide an objective opinion on how diligently a company is meeting its legal compliance oblig­a­tions, thereby providing reassurance to share­holders and other stake­holders. While the primary goal is not to detect fraud­ulent activity, an audit report can identify and uncover incon­sis­tencies or misleading reports that would threaten the company’s credi­bility.

Who can create an audit report?

Only a regis­tered auditor can prepare an audit report. These are profes­sionally qualified accoun­tants who specialize in auditing and are regis­tered with a regulatory body such as the Institute of Chartered Accoun­tants in England and Wales (ICAEW) or the Associ­ation of Chartered Certified Accoun­tants (ACCA).

The audit reports of most listed companies are prepared by “The Big4”. This group is considered the four largest global accounting firms, which include Deloitte, Ernst & Young (EY), Price­wa­ter­house­C­oopers (PwC) and Klynveld Peat Marwick Goerdeler (KPMG). However, these are not the only accounting firms that can provide an audit, and they are certainly not recom­mended for smaller companies that want to perform a non-mandatory audit. The most important point to pay attention to when looking for a chartered accountant is to make sure they are regis­tered to do so.

How long does it take to receive a full audit report?

There is no defin­itive time frame for how long an audit report should take to complete. The timing depends on numerous factors: the size of the company, whether it is a public or private company, how organized and prepared the company is for the audit, whether an audit has already been carried out before by the same auditors (and therefore carried out becomes). You are familiar with company policies and proce­dures) and more. As a general guideline, you can expect a simple audit to take approx­i­mately three months, including 1 month for planning, 1 month for fieldwork, and 1 month for report prepa­ration. However, we must emphasize that this is only a very basic guide. We recommend that you always speak to your auditor so that you under­stand the extent of the work involved and the planned timescale.

When is an audit report due?

As there is no statutory time frame for completing an audit report, it is important that when preparing your own financial state­ments you ensure that you allow suffi­cient time for the auditor to complete their assessment. This is because both your annual accounts and audit report must be filed together with Companies House within your filing deadline. This is 9 months after your company’s fiscal year end date.

Remember, your auditor will provide an outside, independent assessment of your financial record keeping and reporting. This therefore means that the respon­si­bility for ensuring that your accounts are submitted on time with the required reports remains with the company manager(s). If your financial state­ments are not completed until 8 months after your financial year end date, you may be faced with the likelihood that you will probably not meet your filing deadline.

What is included in an audit report?

Audit reports are often extensive and detailed documents that undoubtedly contain a lot of infor­mation. However, you will typically find that this is broken down into core sections that are struc­tured in a standardized format to ensure clarity, consis­tency and adherence to exam standards. You can expect your inspection report to contain the following sections, in approx­i­mately this order:

• title – Although a formality, an audit report always begins with a clear title, which typically includes terms such as “Independent Auditor’s Report” or “Auditor’s Report” to indicate the nature of the document.
• addressee – The audit report identifies the intended recip­ients, which are typically share­holders, the board of directors, or other key stake­holders.
• Intro­ductory paragraph – The intro­ductory paragraph begins by disclosing which financial state­ments were audited and also indicates the exact period covered by the audit report. You can expect this to coincide with the company’s fiscal year.
• Statement of management respon­si­bil­ities – This section of the audit report describes manage­ment’s respon­si­bility for the prepa­ration and fair presen­tation of its financial reports in accor­dance with applicable financial reporting frame­works.
• Presen­tation of the auditor’s respon­si­bil­ities – This part defines the auditor’s respon­si­bil­ities, which are to express an objective opinion on the financial state­ments based on the audit carried out. It should explain how the audit was conducted in accor­dance with auditing standards and what proce­dures were in place to ensure this.
• Scope of the test – This section reports on the extent to which test proce­dures could be imple­mented when carrying out the field work. If there are limita­tions to the inves­ti­gation due to unanswered questions or non-provision of evidence, this will be explained in detail. It may also refer to specific sections of the financial state­ments that are subject to the audit.
• Auditor’s opinion – This is arguably the most important section of any audit report. It provides the auditor with a conclusion as to whether he or she has found evidence to demon­strate that the company’s financial state­ments have been accurately prepared and presented fairly and unbiasedly. They can express their opinion on the company’s financial position, operating results and cash flow according to the financial reporting framework used.
• Basis for the opinion – This is optional, but in some cases the auditor may wish to explain the basis for their opinion. It is more likely to be included in an audit report when there are important consid­er­a­tions or unusual circum­stances.
• Date and signature – This is also another formality, but is included in the test report for the sake of completeness. The audit report is signed by the auditing firm or the individual auditor respon­sible for the engagement. It also contains the date on which the test report was issued. Some audit reports may contain the address of the accounting firm for your reference purposes.

What different audit opinions are possible?

One of the most important things to under­stand from your audit report is the auditor’s opinion. There are four possible audit opinions with varying degrees of conse­quences:

• Unqual­ified opinion – that can also be described as a clean opinion. This is the most desired outcome of the audit opinion because it means that the auditor did not identify any misstate­ments or problems with the company’s financial reporting proce­dures. An unqual­ified opinion confirms that the company has maintained its records in accor­dance with GAAP.
• Qualified opinion – A qualified opinion is issued when the auditor has identified minor circum­stances that prevent him from issuing an unqual­ified opinion. This may occur if the auditor deter­mines that the company did not fully comply with GAAP or if the scope of the audit was limited because the auditor was unable to review areas related to the company’s financial reports. A qualified opinion indicates that certain areas or trans­ac­tions require further attention to improve. However, despite this limitation, a qualified audit opinion assures stake­holders that a majority of financial reports are reliable.
• Negative opinion – A negative opinion has serious impli­ca­tions for a company’s reputation and compliance status. It is rarely issued because it requires an auditor to find signif­icant evidence of gross misstate­ments in the financial state­ments that have the potential for fraud. It alerts stake­holders that critical areas require immediate attention and remedi­ation.
• Disclaimer opinion – In certain circum­stances, auditors may not be able to express an opinion on your financial state­ments. This situation may arise due to limita­tions in the scope of the audit, insuf­fi­cient evidence, or other limita­tions. A disclaimer indicates that the auditor cannot guarantee the accuracy or fairness of your financial state­ments. Although disclaimers are rare, they highlight the need for greater trans­parency and rigor in financial reporting.

What to do after you receive your audit report?

After you receive your audit report, you must first read it thoroughly to gain a clear under­standing of the auditor’s findings, opinions, and recom­men­da­tions. You must then evaluate the potential impact of the results on the company’s opera­tions, financial reporting, compliance and reputation.

If you determine that identified deficiencies should be addressed, an action plan must be created to address vulner­a­bil­ities. The action plan should include final steps, timelines, respon­sible parties and, if necessary, allocation of resources for imple­men­tation. It is important to prior­itize all urgently needed measures.

It is also crucial that you commu­nicate the outcome of the audit report to everyone involved and explain how you plan to resolve any problem areas. This should not neces­sarily be limited to management, but to all employees who contribute to the success of the company. By commu­ni­cating with everyone involved, you can create trans­parency about the results and the actions needed to improve, and strengthen account­ability within the organi­zation.

Once you begin imple­menting your corrective actions, you should closely monitor your progress. It would be beneficial to document and review your new processes and report on both improve­ments and challenges. By doing so, you demon­strate the company’s commitment to its compliance respon­si­bil­ities, strengthen internal controls, and improve perfor­mance. This documen­tation can then also be provided as supporting evidence for your next audit report.

What to do if you don’t agree with your test report?

If you disagree with your audit report, you must resolve the disagreement with your auditor. To do this, you should first ensure that you have reviewed the report against the specific documents that were refer­enced. This allows you to see what they are using to address issues. Next, you should write to the examiner to express your disagreement. It is important that you include convincing evidence to support why you believe your company’s financial state­ments are prepared in accor­dance with GAAP.

Once this has happened, you will likely meet with the examiner again to discuss these issues further. Typically, the discus­sions result in the examiner either providing further expla­nation to refute your disagreement by highlighting areas you missed or pointing out where you misun­der­stood principles, or accepting your claim and initi­ating further inves­ti­gation . It is advisable to exercise caution when disputing an audit report as this often results in additional scrutiny of your internal financial processes and reporting.

If efforts to resolve the disagreement directly with the auditor are unsuc­cessful, you may need to consider escalating the matter to higher levels of management within the audit firm or seeking assis­tance from regulators. This may include raising formal griev­ances or griev­ances in accor­dance with the audit firm’s internal proce­dures or, if necessary, engaging external mediation or arbitration services. In practice, this is extremely rare and rarely produces a satis­factory result as it prevents you from submitting your annual accounts on time.

Find an accountant in Oxfordshire

If you are looking for an auditor for your business accounts in Oxford­shire, then discuss your needs with our helpful team. We will do our best to ensure that your exam goes smoothly and as unobtru­sively as possible, and will provide you with positive and constructive feedback where appro­priate. To contact us, use our online form.