Auditor's report definition
/What is an Auditor’s Report?
An auditor’s report is a written statement made by an external auditor, stating that party’s opinion on whether a client’s financial statements comply with the applicable accounting framework and are free of material misstatements. This report is included with the client’s financial statements when it issues the statements to third parties. The report is intended to provide assurance to users that the financial statements meet certain minimum reporting standards.
An auditor’s report is not a recommendation regarding whether the issuing entity represents a good investment or credit risk. Instead, it only certifies that the issuer has met certain reporting standards in the construction of its financial statements.
Many third parties require organizations to issue financial statements with an auditor’s report, including creditors, lenders, investors, stock exchanges, and some regulators. In particular, a publicly-held company is required to file an auditor’s report alongside its financial statements when making periodic filings with the Securities and Exchange Commission.
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Contents of an Auditor’s Report
Generally Accepted Auditing Standards mandate that a very specific format be used in the construction of an auditor’s report. The wording is tightly defined, in order to place boundaries around the auditor’s legal liabilities regarding his or her opinion statement. The auditor’s report contains three paragraphs, which are as follows:
The first paragraph states the responsibilities of the auditor and the directors of the client business.
The second paragraph describes the scope of the audit engagement.
The third paragraph contains the auditor’s opinion regarding the client’s financial statements and accompanying disclosures.
Types of Audit Reports
There are three types of opinions that an auditor may issue, depending on the findings resulting from the audit engagement. These opinion types are as follows:
Unqualified opinion. The unqualified opinion states that the client’s financial statements do not contain any material misstatements, and conform to the applicable accounting framework. Most opinions are unqualified, since clients are typically willing to alter their financial statements to meet the auditor’s requirements.
Qualified opinion. The qualified opinion states that a client’s financials are fairly presented, except for a specified issue. The issue typically relates to a limitation on the scope of the audit, so that the auditor was unable to obtain sufficient evidence to verify various aspects of the transactions and reports being audited. Qualified opinions may also be issued if there is a lack of conformity with the applicable accounting framework, inadequate disclosure, uncertainties in estimates, or the statement of cash flows has been omitted.
Adverse opinion. The adverse opinion states that the entity’s financial statements do not fairly represent its results, financial position, and cash flows. The opinion may also be issued if certain required disclosures do not accompany the financial statements, or if the entity has not prepared its financial statements in conformity with the provisions of the applicable accounting framework. The auditor states the reason for this type of opinion within the report. Clients will frequently alter their practices in order to avoid having this type of report issued.
The auditor may also issue a disclaimer of opinion, which is a statement that no opinion is being given regarding the financial statements of the client. This disclaimer may be given for several reasons. For example, the auditor may not have been allowed or been able to complete all planned audit procedures. Or, the client restricted the scope of the examination to such an extent that the auditor was unable to form an opinion. If the client allows the auditor to complete planned work, or rectifies an underlying irregularity, then the auditor may be able to issue an unqualified opinion. Until the auditor issues a replacement opinion, the disclaimer remains in force.
Example of an Auditor’s Report
An example of an auditor’s report that contains an unqualified opinion is as follows:
Opinion
We have audited the accompanying financial statements of ABC Corporation, which comprise the balance sheet as of December 31, 2024, and the related statements of income, changes in equity, and cash flows for the year then ended, and the related notes to the financial statements.
In our opinion, the financial statements present fairly, in all material respects, the financial position of ABC Corporation as of December 31, 2024, and its financial performance and its cash flows for the year then ended in accordance with Generally Accepted Accounting Principles.
Basis for Opinion
We conducted our audit in accordance with Statements on Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report.
We are independent of ABC Corporation in accordance with the ethical requirements that are relevant to our audit of the financial statements in [jurisdiction], and we have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with GAAP, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern, and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with Statements on Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
Signature of the auditor
[Name of audit firm]
[Name of engagement partner, if required]
[Address]
[Date of the auditor’s report]
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