Audit report definition

What is an Audit Report?

An audit report is a written opinion of an auditor regarding an entity's financial statements. The report is written in a standard format, as mandated by generally accepted auditing standards (GAAS). GAAS requires or allows certain variations in the report, depending upon the circumstances of the audit work in which the auditor engages. The different types of audit reports are noted below.

Clean Opinion

A clean opinion is issued if the financial statements are a fair representation of an entity's financial position, being free of material misstatements. This is also known as an unqualified opinion. It is the gold standard that outside users of an organization’s financial statements are looking for.

Qualified Opinion

A qualified opinion is issued if there were any scope limitations that were imposed upon the auditor's work. The opinion looks similar to the wording used for a clean opinion, except that additional text summarizes the reason for the qualified opinion.

Adverse Opinion

An adverse opinion is issued if the financial statements were materially misstated. This misstatement may be due to an error, but it can also indicate that management engaged in reporting fraud.

Disclaimer of Opinion

A disclaimer of opinion can be triggered by several situations. For example, the auditor may not be independent, or there is a going concern issue with the auditee, or certain financial records needed by the auditor were not available.

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Contents of an Audit Report

The typical audit report contains three paragraphs, which cover the following topics:

  1. The responsibilities of the auditor and the management of the entity.

  2. The scope of the audit.

  3. The auditor's opinion of the entity's financial statements.

Emphasis-of-Matter Paragraphs

The auditor may elect to include an emphasis-of-matter paragraph in the auditor’s report in order to draw attention to certain issues disclosed in the financial statements that are sufficiently important to be fundamental to user understanding of the financial statements. This paragraph may also be used to draw attention to issues other than those presented in the financial statements that are relevant to user understanding of the audit, the auditor’s responsibilities, or the auditor’s report. For example, any of the following circumstances might warrant the use of an emphasis-of-matter paragraph:

  • A major catastrophe having an effect on the client’s financial position.

  • Significant transactions with related parties.

  • Uncertainty regarding the outcome of important litigation.

  • Unusually significant subsequent events.

Thus, an emphasis-of-matter paragraph refers to a matter disclosed in the financial statements that, in the judgment of the auditor, is sufficiently important to be a fundamental component of the users’ understanding of the client’s financial statements.

Users of an Audit Report

An audit report is issued to the user of an entity's financial statements. The user may rely upon the report as evidence that a knowledgeable third party has investigated and rendered an opinion on the financial statements. An audit report that contains a clean opinion is required by many lenders before they will loan funds to a business. It is also necessary for a publicly-held entity to attach the relevant audit report to its financial statements before filing them with the Securities and Exchange Commission.

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