An audit refers to the examination of the company’s financial statements and activities to find out if they reflect the true financial position of the company.
An audit report therefore is the information gotten from an audit; it’s the summary of what the auditor has gathered from the audit. An auditor after assessing the financial statements could decide either to give a qualified or an unqualified audit opinion, the former refers to an opinion that the financial statements do not reflect the true position of the organization while the latter means that they reflect the true position, however, an auditor should report within the international standards of auditing.
Qualified audit opinions delay the release of preliminary earnings and audit reports. Firms are quick to release information about earnings when the auditors opinion are unqualified than when the auditors opinion is qualified. Those who rely on audit reports such as investors and the general public get concerned when audit reports are qualified since this means lack of confidence in the company’s reputation, management and internal controls.
Unqualified audit opinion implies that a firm can properly account for its revenue, assets, both long and short and long term obligations, expenditures and shareholders funds which further implies that the investors and the general public can rely on the financial statements and use them an decision making. All in all, a clean audit report improves a company’s goodwill while a qualified audit report could cost a company its goodwill since those who rely on the audit report could sue the company for breach of their duty of care (Laulusa 1994).
OBJECTIVES OF AUDIT REPORTS
Audit objectives refer to statements and plans of the activities that the auditor is required to achieve at the end of the audit. In the business environment, audits and audit reports help the management in delegating tasks and duties to their staff, to assess the adequacy of the company’s internal controls owing to the fact that auditors write reports based on whether or not the financial statements reflect sound policies and internal controls and also to establish whether the company’s assets are in the required state in terms of maintenance (Bruner, R.F2009).
Against this background therefore, audit reports are supposed to reflect a true and fair view Of the items in the financial statements in ensuring that the transactions are accurate. The reports should also help the company know whether it needs to make adjustments in their internal controls, procedures- in relation to its financial and operational policies- and processes against yardsticks of sound management. The audit reports also help in detecting any fraud and misappropriations of accounts in the course of the financial year: also in comparison with other external auditors and to check compliance with the company’s policies, government policies and laws of other regulatory authorities.
Banks and some financial institutions asses the audit reports of a company to judge its credit Worthiness, this means that audit reports are helpful in a company getting revenue or external debt and to help in cost saving by identifying which investments give high net present values. The company will easily check its obligations and establish how to meet its short term obligations, other reports that had previously been inspected which could be either internal or external, they are also useful to ensure the company records contracts which it has entered into, creditors of the company can therefore ensure that the company can meet its claims and that they can be compensated should the company face liquidation. A company normally needs financial projections and forecasts such as the sales and the purchases budget which reflect increase its profits, use its retained earnings, and to enable it create reserves for the right purpose and to be safeguarded from incurring continuous losses (Weital, J 1994) .
In the entire industry in which the company operates, it’s important that the company compares its performance with those of other players in the industry in order to maintain a competitive edge over the others, this helps in ensuring healthy competition. Audit reports guides the organization in performance appraisal, provide the guideline for motivation of employees and to maintain professionalism. In complying with the standards of audit reports, revenue authorities could detect fraud in relation to the payment of taxes by checking the profits before and after tax and counter checking with the source documents of a company (Hall, J.L 2009).
Audit reports help in reviewing the company’s forecasts so that with some accuracy predict the future expected financial position and the changes thereof and the results of some of its undertakings. An audit report presents other issues that are otherwise not obvious such as: existence of contingent liabilities, disposal of equipment, items that are obsolete and is also evidence on the quality of work by the auditor: an auditor owes third parties ,investors and creditors a duty of care
EFFECTIVENESS OF AUDIT REPORTS
Audit reports need to reflect a true and fair position of the financial statements in order to build the investor confidence in the company; this enables the growth of financial markets since an investor needs to be confident in order to trade in a company’s securities. Adjustments to the audit and accounting standards come due to preparation of good audit reports since auditors owe the general public a duty to make sound reports that they can rely on for decision making, international standards of reporting therefore need to be high (Diplock 2005).
Audit reports put the company’s management on toes because they risk to ruin the
reputation of the company should the financial statements not reflect the true position of the organization, in such a case, the users of the audit reports may doubt the credibility of the management. A qualified opinion of an auditor in a report may also lad to a company failing to get external debts from creditors, this may mean a company lacks enough capital base for its operations which may in the long run affect the shareholders funds, that is, a company runs at a risk of failing to compensate its shareholders should it be liquidated.
Apart from the above, audit reports display other risks facing an organization such as: inherent risks which are risks that financial reports contain material misstatements, financial risks and compliance risks. Other risks not related to financial reporting are: legal risks, risks related to the operation of the company, risks related to information technology, reputation risks and other current and prospective risks .
A company is not normally responsible for any losses caused to third parties who rely on the
audit report once the auditor agrees that he received enough information to enable him asses the financial statements, upon conclusion of the audit report, such liabilities lie with the auditor since he owes the users of the report a duty of care. Should an auditor approve any information on the report that turns out to be false, he can be sued by third parties for breach of his duty of care if the parties used such information to make decisions which made them incur losses. A company is therefore relieved from such liabilities (Steve .A et al).
Companies in an industry can use financial and audit reports to calculate ratios such as: profit
ability, capital structure, liquidity and gearing ratios, this helps in instigating positive competition among different firms in the same industry. Comparisons of ratios can also be useful in case companies want to get involved in mergers and or partnerships, in the same stride, companies use audit reports to be careful about take over bids by competing partners in the same industry.
In summary, auditors should always ensure that audit reports are timely and that they reflect a
true and fair position of the organizations financial statements, this is important if the auditor is to evade liability. Audit reports are also important to a company since they point out to where the company should make adjustments-they contain recommendations-and this keeps the company’s management on track. A company by having a timely audit report can follow up on whether it meets the international standards of reporting and auditing and also if it meets the standards of regulatory authorities such as the government. All in all, audit reports keep a company in check and guides its relationship with the investors, capital and financial markets and the outside world in general (Soltani. B 2002).
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