January 14, 2020

Audit Reporting: Advanced Guide for CFOs

Compliance Risk
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Maintaining accurate financial statements is a top priority of any finance team. Audit reporting is an important matter that helps to ensure a company’s financial reporting is remaining compliant with the generally accepted accounting principles (GAAP). 

We’ll cover everything you need to make sure that your audit reports are in good standing, plus you will see how automation tools can save time, money and make any auditing process smoother. 

What is Financial Reporting and Audit? Definitions & Uses 

As you know, financial reporting refers to the disclosure of a company’s financial status to external stakeholders and internal management for a given time period. This generally takes place quarterly or annually and will rely on the composition of several statements, like the balance sheet, income statement, cash flow statement, to name a few. 

Audit reports are a written letter created by an independent auditor who checks the aforementioned statements to deduce whether or not they have been created in compliance with the GAAP. This letter serves the purpose of signalling to both creditors and banks that the financial statements are in good standing so that they can make educated conclusions about a business’ creditworthiness. It’s also used by investors when deciding whether or not to invest in a business. For these reasons, an audit report is very important document and can greatly impact a business’ opportunity for growth and longevity. 

Audit Report Uses & How it Works

Audit reports get attached to a company’s financial statements. It must be filed along with the statements to the Securities and Exchange Commission (SEC) when a company submits its earnings. While the audit report is not purposed as an analysis of whether or not a business makes a good investment or not, it does contain an auditor’s opinion. 

A clean audit report will verify that a business adheres to GAAP when reporting. This is why it’s so important to keep consistent records and reporting processes. Whether you have a scattered financial team or finance shared services, an automation tool will easily ensure that your accounting processes are consistent and standardised. 

Key Features of Advanced Audit Reporting

Audit reports and financial statements are regulated. As such, there are standards that stipulate what must be included in advanced audit reports. The audit report format slightly varies based on whether or not a business is listed or not. A listed entity refers to an entity that is publicly traded. 

Listed entities: Audit reports must include the following for listed entities:

  • Key audit matters  (KAM) - the key aspects an auditor felt were most significant in the audit, matters communicated that required extra attention (i.e. higher assessed risk)
  • Inclusions - reference to the disclosure, how the matter was addressed and why it was considered to be a KAM 
  • Exclusions - any matter that required an auditor to change their opinion under ISA 705 
  • Name of engagement partner 

All entities: Audit reports should include:

  • An opinion section (followed by the Basis of Opinion) 
  • Going concern - anything that the auditor deems management to consider, challenge of disclosures for close calls where doubt exists, etc. 
  • Auditor independence - A statement that discloses that the auditor is independent and upholding his/her ethical responsibilities under the Code of Ethics 
  • Auditor responsibility - An appendix or link that describes the key features of the audit and the auditor’s responsibilities 

What Are the 4 Types of Audit Reports? 

Once an audit has been performed, the business will receive a final judgement, which reflects the four types of audit reports. 

The audit report, regardless of the final opinion, will generally contain three paragraphs. The first states the auditor’s responsibilities, the second reflects the scopes and the standard accounting principles that served as the guideline for the opinion, and a final paragraph containing the auditor’s opinion. The third paragraph is where most investors spend their energy. 

The four types of opinions could be:

  •  Unqualified Opinion: Also known as a clean opinion, an unqualified opinion means that the auditor found that the financial records were “free of any misrepresentations.” As the most desirable type of audit report, the unqualified opinion is a statement that the business’ reporting is in line with GAAP. 

An unqualified report typically has the word “independent” in its title so that any reader understands it has been completed by a third party. Most audits will fall under this category, but it really does depend on the success of the finance team. With the right tools and process management in place, this type of report is definitely feasible for any size team. 

  • Qualified Opinion: A qualified opinion reflects that a business did not adhere to the proper accounting principles. At the same time, it doesn’t mean that they did anything wrong. Instead, it could simply reflect a mistake, such as a calculating error. An auditor is likely to highlight where the error occurred so that the business can move forward and rectify the issue. 

One reason why this could happen is because of a human error, or honest mistake in data entry. This type of audit report looks a lot like an unqualified opinion, just with the additional paragraph that will explain why the report is unqualified. 

  • Adverse Opinion: An adverse opinion means that the business had both errors in reporting and also didn’t follow accounting guidelines. This creates suspicion where there’s doubt about material misrepresentations, or in simpler terms, an implication of fraud. However, the auditor may not have concrete evidence to prove fraud. This is the worst type of audit report that a business can receive. 

Not only are there lasting effects, but there are also legal consequences if the statements don’t get corrected. Banks, investors, and even public opinion will certainly sway at the hands of an adverse opinion audit report. When a business receives an adverse opinion audit report, it must redo its financial statements and submit for another audit because this is an unaccepted type of report. 

  • Disclaimer of Opinion: If for any reason an auditor cannot finalise their audit or doesn’t choose to give an opinion, then there will be a disclaimer of opinion report. Some reasons that this could happen could be that the auditor is biased or they weren’t provided with the financial information they needed to adequately complete the audit. 

Advantages of Audit Reporting

There are several reasons why audit reporting can provide benefits to a business, as well as external stakeholders and investors. Here’s a look at some of the upsides:

  • Adds credibility and assurance to financial statements (of course, this is only true when the audit report is conducted by an independent and professional auditor.) 
  • Provides peace of mind to stakeholders about the organisation’s managerial ethics. 
  • Most countries specify criteria by which financial statements must be audited by independent auditors so it’s in adherence to laws and regulations.
  • Shareholders require audits.
  • A parent company may operate subsidiaries and require audits to better manage their organisations.
  • It’s an easy way for stakeholders to understand more about an organisation’s operational and financial efficacy. 

Limitations of Audit Reporting 

As with anything that contains an opinion, there are some downsides associated with audit reports. Let’s take a look at some cited limitations:

  • An organisation’s management team may feel inclined to limit an auditor’s reach for information or sensitive data. This could happen if an organisation’s leaders feel that the auditor has any motive to breach confidentiality, which could result in an unfavorable auditor’s opinion.
  • Auditors generally face tight time constraints and may need to rush through their process. However, an organisation can be better prepared for audit reports by leveraging finance automation tools that inherently document each record and transformation. Thus, the tool can provide an audit report with audit trails that are straightforward and undoubtedly accurate as the system has tracked everything. 
  • An auditor may have an innate bias against an organisation. After all, auditors are human, too.
  • There are risks that an auditor could miss, like inherent risks or fraud risks. 
  • An auditor representing a firm must hold a CPA qualification, but the quality of audit reports can still vary according to an auditor’s level of competency.

Wrap Up 

Audit reports provide a type of checks and balances system to an organisation’s financial statements. Each different type of audit report depends on an auditor’s opinion. If there’s any issue detected by an auditor, then the business retains the right to go back into the statements and address problems. 
With finance automation tools, an organisation can save time, money, reduce errors and reduce reputational risk. This is accomplished by allowing the tool to perform much of the tedious and repetitive manual tasks that are required to maintain financial records and remain in line with the generally accepted accounting principles.

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