CHAPTER SEVEN

AUDIT REPORT
7. 1 Introduction
All the work of an audit is directed to words the final objective the report to the members
of a company client or to the owner(s) of an un- incorporated one. An audit is the
independent examination of, and expression of opinion on the financial statements of the
company by an appointed auditor in pursuance of that appointment and in compliance
with any statutory obligation. The responsibility for the preparation of the financial
statements and the presentation of the information included there in rests with the
management of the company. The auditors responsibility under the companies act is to
make a report to the members of the company on the books of account and financial
statements besides other necessary and relevant documents examined by him.
The auditor’s report is the means by which the auditor formally communicates the results
of his audit to the members of the company as well as to the readers of financial
statements viz creditors, financial institutions and all others who have a stake in the
company or wish to acquire a stake or transact with the company. The messages that are
communicated through the audit report are based on various conclusions reached by the
auditor in the course of his examination.
All that the auditor can do is to report whether or not, in his opinion, the financial
statements are true and fair. Different auditors may form different opinions based on their
exercise of judgment on the same set of financial accounts. The auditors are free to form
individual opinion which may vary to a reasonable extent.

7.2 FORM AND CONTENT OF AUDIT REPORT

The form and content of audit report are governed by many factors. In many cases, where
audit is carried out in pursuance of the provisions of any statutory or regulatory
requirement, the form and content of the audit report are usually prescribed by the
relevant statute or regulatory in some cases, especially where the audit is not required by
a statute or a regulatory requirement, the terms of engagement of the auditor specify the
matters to be contained in the audit report. The prevailing customs, practices and the
recommendations/ requirements of professional accounting bodies may influence the
form and content of the audit report.
From the above, it can be seen that there can not be a standard form of audit report
applicable in all auditing situations. The exact form and content of audit report would
depend upon the specific circumstances of each individual case. However, there are
certain basic elements which should be present in a good audit report.. To facilitate their
understanding, we shall discuss them with the help of a specimen audit report in the case
of an independent financial audit of a company governed by the provisions of the
companies Act, which is given as exhibit below.
(Next page)
The opinion of an auditor regarding the financial statements of a client is expressed in the
form of a report. The report sets for the scope of the audit and the auditor’s opinion
concerning the fair presentation of the statement. Audit reports may be short or long form
audit.
Short form audit reports commonly are issued to non administrative stocks holders and to
creditors. Long form audit reports (if requested by the client) are issued to management
and may or may not be issued to stockholders, creditors, analysis and others.
Any audit report should be includes the scope and nature of the audit work and the
opinion of the auditor.
Exhibit: - Specimen Audit Report
Auditors’ Report
To
The members of Alpha share company
P.O.Box -------
Addis Ababa
Ethiopia
We have audited the attached balance sheet of Alpha Sh. Company as June 30, 200 X and
the profit and loss Account for the year ended on that date annexed there to and report
that:
 1. As required by the manufacturing and other companies (Auditor’s Report) order
issued by the department of company affairs under section… of the companies
Act, we enclose in the annexure to this report, a statement on the matters specified
in paragraphs….
2. Further to our comments in the annexure referred to in paragraph 1 above, we state
that
a. We have obtained all the information and explanations which to the best of our
knowledge and belief were necessary for the purpose of our audit
b. In our opinion proper books of account as required by law have been kept by the
company so far as appears from our examination of those books, and proper
returns adequate for the purposes of our audit have been received from branches
not visited by us
c. The balance sheet and profit and loss account (income statement) referred to in
this report are in agreement with the books of account and returns.
d. In our opinion and to the best of our information and according to the explanations
given to us, the said balance sheet and profit and loss account read together with
the notes there on give the information required by the companies act, _______ in
the manner so required and give a true and far view.
i. Insofar as it relates to the balance sheet, of the state of the affairs of the
company as at June 30, 200 X and
ii. Insofar as it relates to the profit and loss account, of the profit of the company
for the year ended on that date.

Place:- Addis Ababa For AK ∞ co.

Date:- October 21, 200X chartered Accountants
Sd/
Mr X
Partner

7.3 PARTICULARS TO BE FURNISHED IN THE AUDIT REPORT

Auditor’s report normally shows the scope and nature of the audit work and the opinion
of the auditor. The scope part of the auditor report consist of a representation as to the
work performed it shows the extent to which the auditor has conducted his examination
and the nature of such an examination. The opinion part contains judgment or impression
of the auditor about the truth and fairness of the accounts of balance sheet and income
statement. In the audit report and auditor is required to express an opinion on various
matters. For instance, in the case of a financial audit, he has to state whether in his
opinion the financial statements exhibit a true and fair view of the affairs of the company
under audit. The basic elements or contents of the audit report are as follows.
1. Title:- an appropriate title such as auditor’s report, helps the readers to identify the
report and to distinguish it from the reports issued by others.
2. Addressee:- the report should be addressed to the client. When the client is a
company, the report should be addressed to the shareholders.
3. Identification of financial statements:- the financial statements can be identifies
from the date of and period converted by the financial statement
4. Responsibility:- the opening paragraph should state that the financial statements
are the responsibility of the entity’s management and that the responsibility of the
auditor is to express an opinion thereon.
5. Reference to auditing standards or practices:- such a reference in the report
assures the reader that the audit has been carried out in accordance with
established standards or practices
6. Description of audit:- the report should describe what the audit is, the audit should
be described as including an examination, on a test basis, of evidence supporting
the financial statements, assessment of accounting principles followed and
significant estimates made, and overall evaluation of financial statements
presentation. It should also be stated that the audit provides a reasonable basis for
the auditor’s opinion.
7. Opinion on the financial statements:- the report should clearly set forth, the
auditor’s opinion on the entity’s financial position and operational results the
financial statements given a true and fair view. A reference to accounting
standards should be made in order to advise the reader of the framework within
which the auditor has reached his professional opinion.
8. Signature:- the auditor’s report should bear the manual signature of the auditor.
9. Auditors address:- the report should name a specific location, which is usually the
city in which the auditor maintains his office.
10. Date of the audit report:- the audit should be dated. The date of the audit report
signifies the date of completion of the audit work.
7.4 TYPES OF AUDIT REPORTS /OPINIONS
The auditor’s opinion expressed in the audit reports may be classified as under:
1 Unqualified /clean / Positive Audit report
2 Qualified audit report
3 Adverse negative audit report
4 Disclaimer of audit opinion

7.4.1 CLEAN /UNQUALIFIED/POSITIVE AUDIT REPORT

Where an auditor gives an opinion on the various matters without any qualification or
reservations, it is considered to be a clean report. For example an unqualified opinion
would be a statement by the auditors that “in our opinion and to the best of our
information and according to the explanations given to us, the balance sheet and the
profit and loss account give a true and fair view of the state of affairs and working results,
in majority of cases, audit reports are found to be positive or clean or unqualified i.e. a
report with out any reservation on part of the auditor.
It should be pointed out that an auditor is not a guarantor or an insurer, if he gives a
clean report, it does not mean that it is completely accurate.

7.4.2 QUALIFIED AUDIT REPORT

Where an auditor gives an opinion subject to certain reservations, he is said to have given
a qualified opinion.
A qualified opinion should always contain the phrase “subject to” or “except for”. “with
the exception of” the item(s) or matter(s) to which the qualification is related.
For example: Owing to the destruction by fire of the company’s old records it has not
been possible to ascertain the original lost of and the total depreciation written off on the
fixed assets. An analysis of the original expenditure on fixed assets is also not available.
It is not possible therefore, to give the particulars offered assets required under the
companies act.
“Subject to above, we report that….”

7.4.3 ADVERSE OR NEGATIVE AUDIT REPORT

An auditor can make an adverse or negative report when there is a reasonable ground for
him to form an opinion that the accounts and financial statements taken as a whole, do
not present a true and fair view of the financial position and the working results of the
company. If the auditor wish to give an adverse report, he should disclose all material
reasons which have obliged him to make such report. For instance, an auditor may give
an adverse or negative opinion when he is highly dissatisfied about the truth and fairness
of the financial state of affairs and the working results of an undertaking.
The fundamental rule in this regard is that where the reservation or qualifications are so
material that rendering a qualified opinion will not serve the object, the alternative is to
give a negative opinion or adverse audit report.
For example:- “in view of our comments made above we are of the opinion that balance
sheet and the profit and loss account do not give a true and fair view ----“

7.4.4 DISCLAIMER OF AUDIT OPINION

If an auditor fails to obtain sufficient information which result in his inability to express
any opinion on the financial statements he can give a disclaimer of opinion. The auditor
may state that he is unable to express an opinion for want to sufficient evidence.
This opinion is arise these may exist material items the value of which may be to fully un
certain, or certain material information or explanation may not be forthcoming because
some of the records have destroyed due to fire, flood and such other incidents.
For example “One of the four factories of the company are situated in Iraq, due to the
disturbed civil conditions in that country, the audit reports on the accounts of the a
foresaid factories have not been received. In view of the significant of these maters, we
are unable to state whether the balance sheet and the profit and loss account give true and
fair view.”
 Specimen Audit Report – Qualified opinion
Auditors report

To
The members of Beta sh. Company
P.O.Box ----
Addis Ababa
Ethiopia

We have audited the attached balance sheet of Beta sh. Company as June 30, 200x and the
profit and loss Account for the year ended on that date annexed there to and report that:-
1. As required by the manufacturing and other companies (Auditors report) order
----- issued by the department of company affairs under section ----- of the
companies Act , ---- , we enclose in the Annexure to this report a statement on the
matters specified in paragraphs--------
2. Further to our comments in the Annexure referred to in paragraphs above, we
state that:
a. We have obtained all the information and explanations which to the best of our knowledge and
belief were necessary for the purpose of our audit.
b. In our opinion, proper books of accounts as required by law have been kept by the company so
far as appears from our examination of those books, and proper returns adequate for the
purpose of our audit have been received from branches not visited by us.
C. The Balance sheet and the profit and loss account referred to in this report are in agreement
with the books of account and returns.
d. The company has followed the policy of accounting for interest income on receipt basis rather
than on accrual basis. As a result, the net profit for the year and the current assets are
understated by birr ---- each as compared to the position which would have prevailed if the
company had accounted for interest income on accrual basis.
“Subject to our observations in paragraph 2 (d) above”, we report that in our opinion and to the
best of our information and according to the explanations given to us, the said balance sheet and
profit and loss account read together with the notes there on give the information required by the
companies act, ---- in the manner so required and give a true and fair view.
i. Insofar as it relates to the balance sheet, of the state of the affairs of the company as at June
30, 200 X and
ii. Insofar as it relates to the profit and loss account, of the profit of the company for the year
ended on that date.

Place:- Addis Ababa For GR ∞ co.

Date:- December 31, 200X chartered Accountants
Sd/
MrY
Partner

THE RELATIONSHIPS AMONG AUDITORS AND USERS

There is a relationship between internal and external auditing as illustrated in the
above figure shows both groups of auditors rely on the same data base. Also,
internal users rely on both internal and external auditors and external users rely
only on external auditors. Importantly, external auditors can and often rely upon
internal auditor’s work when the internal audit function is strong. As a result, an
organization’s internal audit function can have an effect upon the scope of an
independent external auditor’s examination

A sample process by which the audit reports reaches various parties as follows

7.5 MATERIALITY AND AUDIT OPINION

Materiality is an essential consideration in determining the appropriate type of report for
a given set of circumstances. For example, if a misstatement is immaterial relative to the
financial statements of the entity for the current period and is not expected to have a
material efficient in future period, it is appropriate to issue an unqualified report. A
common instance is the immediate expensing of office suppliers rather than carrying the
unused portion in inventory because the amount is insignificant.
The situation is totally different when the amounts are of such significance that the
financial statements are materially affected as a whole. In these circumstances it is
necessary to issue a misstatement. In other situation, of lesser materiality, a qualified
opinion is appropriate.
The common definition of materiality as it applies to accounting and, therefore, to audit
report is misstatement in financial statements can be considered material if knowledge of
the misstatement would affecte a decision of a resonabel user of the statement, in
applying this definition, three levels of materiality are usedfor determine the type of
opinion to issue as follows.
A. Amount are immaterial: - When a misstatement in the financial statements exists but
is unlikely to affect the decisions of a reasonable User, it is considered to be immaterial.
An unqualified opinion is these appropriate for example. Assume that management
recorded unexpired insurance as an asset in the previous year and decides to expense it in
the current year to reduce record keeping costs. Management has failed to follow GAAP,
but if the amounts are small, the misstatement would be immaterial, and a standard
unqualified audit report would be appropriate.

B. Amounts are material but no overshadow to financial statements as a whole:- The

second level of materiality exists when a miss stamen in the financial statements would
affect a user’s decision, but the over all statements a re still fairly stated, and therefore
useful. For example, knowledge of a large misstatement in fixed assets might affect a
user’s willingness to loan money to a company if the assets were the collateral. A
misstatement of inventory does not mean that cash, accounts receivable, and other
elements of financial statement or the financial statements as a whole, are materially
incorrect.
When the auditor concludes that a misstatement is material but does not over shade the
financial statement as a whole, a qualified opinion (using “except for”) is appropriate.
C. Amount are so material or so pervasive that overall fairness of the statements is
in question:- The highest level of materiality exists when users are likely to make
incorrect decisions if they rely on the overall financial statements, a large misstatement
would probably be so material that the auditor’s report should indicate the financial
statements taken as a whole cannot be considered fairly stated. When the highest level of
materiality exhibits, the auditor must issue either a disclaimer of opinion or an adverse
opinion depending on which conditions exist.
Relationship of material to type of opinion

Materially Level Significant in terms of plausible Types of opinion

users’ decisions
Immaterial Users’ decisions are unlikely to be Unqualified
attracted
Material Users’ decisions are likely to be Qualified
affected only if the information is
question is important to the specific
decisions being made. The overall
financial statements are presented
fairly.
High material Most of all users’ decisions based Disclaimer or Adverse
on the financial statements are
likely to be significantly affected