Audit report

accounting

The audit report is a report made by an external auditor where it expresses a non-binding opinion on the annual accounts or financial statements presented by a company.

Therefore, it is the report resulting from an accounting audit, which is the systematic process of reviewing the annual accounts of a company, in order to verify that they reflect its true image.

There are several factors to consider in understanding how audit reports work:

  • The auditor can be both a natural and a legal person. In the latter case, it is a company dedicated to auditing.
  • The auditor must be external. An auditor can be external (if he does not belong to the company) or internal (if he belongs to it). Both can make audit reports, but the really valid ones are those made by external audits. The interns are a mere control mechanism within the organization itself.
  • The audit report expresses a non-binding opinion of the auditor. In other words, the auditor expresses his opinion about the company's annual accounts. This report, therefore, expresses the auditor's perception; it is not an absolute truth, and therefore it is not binding. However, as we will see in the last section, on many occasions these reports are taken into account as more than just an opinion.
  • They deal with the annual accounts or financial statements. The statements that are audited are the balance sheet, the income statement, the statement of changes in equity and the statement of cash flows.

The Auditor's Opinion: Types of Audit Report Resolution

The objective of the auditor's report is to express an opinion on the financial statements. There are different types of opinion, depending on whether the financial statements reflect the true image of the company or not:

  • Clean or unqualified opinion: The audited annual accounts reflect the true image of the company in accordance with the regulatory framework of reference.
  • Qualified opinion. The auditor has found certain deviations in the annual accounts with respect to the regulatory framework of reference and these, except for that exception, reflect the true image of the company.
  • Adverse or negative opinion. It is found that there are relevant deviations in the preparation of the financial statements in relation to the reference regulatory framework.
  • Abstention or denied opinion. This opinion is given when there is a limitation to the scope of the auditor's work and this has not allowed him to obtain sufficient evidence to make a judgment on whether the annual accounts reflect the true image of the company. This is the worst solution for the company, since the auditor cannot issue an opinion on the annual accounts.

Importance of audit reports

Although we have commented that the audit report is a simple non-binding opinion, the truth is that its importance in the business context is very high. This importance is reflected in terms of its obligatory nature:

  • Obligation to prepare an audit report. Sometimes the legislator establishes that certain companies have the obligation to be audited. It usually happens with listed companies.In this case, logically the audit report reaches vital relevance, since it is the information that people outside the company have to check whether the financial statements are reliable or not.
  • No obligation to prepare an audit report. Most companies do not have the legal requirement to be audited. However, many of them are audited, since third parties have greater confidence in the company if there is a favorable audit report. Examples in which an audit report can benefit the company: When applying for a bank loan, when trying to attract new shareholders, etc.

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