Chapter-Five

Audit Report & Certificate

 Meaning of Audit report
An auditor’s report is the independent examination and
expression of opinion on the financial statements of the
company by appointed auditors.
The responsibility for the preparation of the financial
statements and the presentation of the information
included there in rests with management of the company.
The auditor’s report is, therefore, the means by which the
auditors formally communicates the results of his
/her/audit to the members of the company as well as to
the readers of financial statements, such as creditors,
financial institutions, and all others who have a stack
in the company.
 Cont’d
The auditor’s report does not guarantee the truth
or otherwise of the matter reported upon; it is
expression of auditors’ opinion on the financial
statements. That is, an auditors opinion on the
financial statements. That is, an auditor’s
/auditors/ can not ascertain and state or certify
the exact figure of various assets and liabilities.
 Essential of good audit report

• A good report from the auditor should normally be brief,

precise, simple, and intelligible to common man, explicit, free
from fear and favor, not true and fair opinion unless supported
by the evidence. A good report from the auditor should normally
have the following qualities:
• Factual Information.
• Independent and unbiased approach.
• Effective presentation.
• Honest identification of weakness in control.
• Positive outlook, balanced criticism and logical suggestions.
• Precise, brief and relevant.
• A good report must at least meet the following qualifications:
1. It2. It should be convincing
3. It should be forceful
4. It should be unbiased
5. It should point out mistakes
6. It should be a constructive criticism and not be in
reprimanding tone
7. It should offer constructive and timely suggestions to
management.
8. It should be brief. If it is lengthy, the object of the report is
defeated even if it
is well written.
should be based on the factual information.
 Scope of Audit Report
• a. whether he has sought and obtained all the information and
explanations which to the best of his knowledge and belief were
necessary for the purpose of his audit and if not, the details thereof
and the effect of such information on the financial statements;
• b. whether, in his opinion, proper books of account as required by
law have been kept by the company so far as appears from his
examination of those books and proper returns adequate for the
purposes of his audit have been received from branches not visited
by him;
• c. whether the report on the accounts of any branch office of the
company audited under sub-section (8) by a person other than the
company’s auditor has been sent to him and the manner in which he
has dealt with it in preparing his report;
 Contentes of Audit report
• a. whether he has sought and obtained all the information and
explanations which to the best of his knowledge and belief were
necessary for the purpose of his audit and if not, the details thereof
and the effect of such information on the financial statements;
• b. whether, in his opinion, proper books of account as required by law
have been kept by the company so far as appears from his examination
of those books and proper returns adequate for the purposes of his
audit have been received from branches not visited by him;
• c. whether the report on the accounts of any branch office of the
company audited under sub-section (8) by a person other than the
company’s auditor has been sent to him and the manner in which he
has dealt with it in preparing his report;
• d. whether the company’s Balance Sheet and Profit and
Loss account dealt with in the report are in agreement
with the books of account and returns;
• e. whether, in his opinion, the financial statements comply
with the Accounting Standards;
• f. the observations or comments of the auditors on
financial transactions or matters which have any adverse
effect on the functioning of the company;
• g. whether any director is disqualified from being
appointed as a director under sub-section (2) of section
164;
• h. any qualification, reservation or adverse remark relating
to the maintenance of accounts and other matters
connected therewith;
 Form of audit report
Audit report should cover the following forms:
1. Title: An appropriate title as ‘Independent Auditors Report,’
helps the users / readers / to identify the report and to distinguish it
from reports issued by others.
2. Addressee: The report should be appropriately addressed. For
example: In most cases the report is addressed to the
shareholders.
3. Identification of financial statements (Introductory
paragraph): The fist paragraph of the auditor’s report is reflected
to as the introductory paragraph. It clearly states:
– The financial statements that have been audited
– The financial statements are the responsibility of
managements
– The auditors’ responsibility is to express an opinion on them.
 Cont’d
The financial statements can be identified by
including the name of the entity and the date period
covered by the financial statements.
4.Reference to auditing standards or
practices(scope paragraph):
The second paragraph of auditors’ report which
describes the nature of an audit, that is, the
standards being followed and procedures
applied.
Such references in the report assure the reader that
the audit has been carried out in accordance with
established standards or practices.
 Cont’d
5. Opinion on the financial statements (opinion
paragraph):
 The third paragraph of auditors’ report which
describes the auditors opinion on the financial
statement .
The report should clearly set forth the auditors
opinion on the entity’s financial positions and
operational results
e.g. The financial statements give a true and fair
view.
 Cont’d
6. Signature: The report should be signed in the name
of the audit firm or the personnel name of the firm
sings on behalf of the firm.
The report is singed with the name of the CPA firm,
not the name of an individual partner in the firm.
The date under signature is normally the last day of
field work
7. Auditors’ or Audit firm’s Address: The report
should also mention the specific location in the city
where the auditor(s), or audit firm maintain his
offices.
 Basic elements of an auditors’ report
1. Title: The title indicates the nature of report.
2. Addressee: The auditor’s report should address the person to
whom it is meant
to be forwarded.
3. Opening (or) introductory paragraph
1. Identification of financial statements audited.
2. A statement on the responsibility of the entity’s management and
that of
auditor.
4. Scope paragraph
1. A reference to the auditing standards generally accepted in BD.
2. A description of work performed by the auditor.
 5. Opinion paragraph
1. A reference to the financial reporting framework used to prepare
the
financial statements.
2. Expression of opinion on the financial statements

6. Date of the report: The date of report indicates the date on which the
auditor
signs his report.
7. Auditor’s signature: The report should be signed by the auditor in his
personal name.
Sometimes, the governing enactments may require of certain statements
(or)matters in (or) with the auditor’s report. In such cases, the auditor’s
report include all those matters in addition to the matters as specified.
 Audit report & Audit Certficate
 An audit report means an expression of opinion while
audit certificate means the person issuing or signing
the certificate vouchs the truth of the statement made by
him. * The audit report is based on facts, estimates and
assumptions while the auditor's certificate is based on
actual facts. A certification audit is an audit your
selected registrar will conduct to verify conformance
against the ISO 9001 standard before they issue your
official ISO 9001 certificate. Certification audits are
most often broken into two stages.
 Differences between Auditor’s Report and Certificate

Points Auditor’s report Auditor’s certificate

It is a confirmation of correctness and accuracy

1. Nature It is an expression of opinion about the account.
about some matters.

The report is based on assumptions and The certificate is based on actual figures and
2. Basis of audit
estimations. facts.

There is no scope of criticism about the

3.Criticism There may be criticism about the report.
certificate.

4. Scope The scope of the report is large. Its scope is limited.

In the scope, there is a scope of giving No scope of constructive advice Exists in case of
5. Scope of advice
constructive advice to the company. a certificate.

After the end of each accounting, the year report

6. Time of issue A certificate is not mandatory in every year.
is mandatory.

7. Liability of As a report is merely an opinion, if it is not In case of the wrong certificate, the auditor will
auditor correct, the auditor may not be held responsible. be held responsible.
 Types of auditors’ reports (opinions)

The auditors’ reports may be classified as

follows. 
A. Unqualified ( clean ) report
B. Qualified report / negative report/
C. Adverse report
D. Disclaimer of opinion ( no-opinion)
 1. Unqualified (clean) report
An auditors’ report with an unqualified opinion may
be issued only when the following two conditions
have been meet.
1. The financial statements are presented in conformity
with generally accepted accounting principles,
including disclosure.
2. The audit was performed in accordance with generally
accepted auditing standards, with no significant scope
limitations preventing the auditors from gathering the
evidence necessary to support their opinion.
 The unqualified opinions, of course, the most
desirable report from the client’s point of view.
 Cont’d
The unqualified auditors report could take either of the
following two forms. 
(A). An unqualified opinion- standards report: The standard
report express a “ clean opinion” and may be issued only
when the two conditions listed in the preceding sections
have been met and when no conditions requiring
explanatory language exists.  
(B)An unqualified opinion - with explanatory language:
under certain circumstances, auditors add explanatory
languages to their report, even when issuing an unqualified
opinion.
Adding the additions languages is not regarded as a
qualified; rather, the language merely draws attention to a
significant situation.
 Cont’d
Auditors may add explanatory languages to a report to:
(i) Indicate that a part of the audit was performed by
other auditors
 The principal auditors have two basic alternatives in
working their report. These are:
A. Make no references to the other auditors
B. Make reference to the other auditors
ii. Point out an uncertainty about the company’s ability
to continue as a going concern.
iii. Describe an inconsistency in the application of
accounting principles
iV. Emphasize a matter
 2. Qualified opinions
 Qualified opinion expresses the auditor’s
reservations or uncertainty about fair presentation
in some areas of the financial statements.
The opinion states that except for the effects of
some deficiency in the financial statements, or
some limitations in the scope of the auditors’
examination, the financial statements are presented
fairly.
All qualified reports include a separate explanatory
paragraph before the opinion paragraph disclosing
the reasons for the qualification.
 Cont’d
Auditors may issue qualified audit opinion when:
1. There is a departure from generally accepted
accounting principles by client and auditors do
not agree with the accounting principles used in
preparing financial statements.
 When the departure is immaterial, on unqualified
opinion may be issued.
2. Scope limitations: limitation on the scope of an
audit arise when the auditors are un able to perform
an essential audit procedures. Limitation may be
imposed either by circumstances surrounding the
audit
 Cont’d
When the circumstance imposed scope limitation is
involved, the auditor will attempt to perform
alternative procedures to gather sufficient competent
evidential matter, and may issue an unqualified opinion
if the collected evidential matters are believed by the
auditors to be sufficient. Otherwise, qualified opinion
may be issued or an auditor may disclaim an opinion.
3. When the account do not disclose a true and fair view
of the companies affair, and when books of accounts
have not been kept in accordance with the law and
profit and loss accounts are not in agreements with the
books of account and other related issues.
 3. Adverse Opinions
 An adverse opinion is the opposite of an
unqualified opinion; it is an opinion that is issued
when;
1. The financial statements do not present fairly the
financial position, results of operation, and cash
flows of the client in conformity with generally
accepted accounting principles.
2. When the deficiencies (departure) in the financial
statements are so significant, that the financial
statements taken as a whole are misleading.
 Cont’d
An audit report that express an adverse opinion generally includes
standard introductory and scope paragraphs, one or more
explanatory paragraphs preceding the opinion paragraph and
describing the reasons for the adverse opinion, and an opinion
paragraphs.
4. Disclaimer of opinion:
A disclaimer of opinion means giving no opinion as to the status of
the financial statements under audit. Auditors issue a disclaimer
whenever:
1. Auditors are un able to form an opinion or have not formed an
opinion as to the fairness of presentation of the financial statements
due to significant scope limitations either by substantial
circumstances and/ or by client and this limitations of scope
precludes the auditors’ compliance with generally accepted auditing
standards and
2. When a material uncertainty affects the financial statements.
 Modified Report
• Audit report is said to be unmodified if auditor releases
such report which has the exactly the same format or
contents as are mentioned for the report which should be
given if financial statements are giving true and fair view.
• Under IAASB auditing standard ISA 700 (read para 20
through 40), the format of the report has been suggested
which auditor shall follow if financial statements are
giving true and fair view provided the same auditing
standards are applicable in the given situation. However, if
any addition or deletion is made in this format, the audit
report is stand modified.
• Under International Standards of Auditing, report is modified in
the following two situations:
• When the opinion is not modified but addition of Emphasis of
Matter paragraph and/or Other Matters paragraph
• When the opinion is modified
• Opinion is modified if auditor concludes that circumstances require
that qualified opinion, adverse or disclaimer of opinion should be
reported.
• When auditor’s report is modified due to addition of Emphasis of
Matter paragraph or Other Matters paragraph then only auditor’s
report will be considered as modified NOT the audit opinion. Audit
opinion is not affected by the addition of any of these two
paragraphs. Also ISA 706 requires the auditor to mention it clearly
that audit opinion has not been modified due to such inclusions.
• In summary here are the situations when auditor’s
report is unmodified and modified:
• Unmodified report
– Unmodified opinion
• Modified report
– Unmodified opinion + Emphasis of matter paragraph and/or
Other matter paragraph
– Modified opinion
• Qualified opinion
• Adverse opinion
• Disclaimer
Whenever a modification is discussed in standards, it always
refers to modification in opinion. In other words, there is no
such thing as modified report without modification in opinion.
 Auditores report& True and Fair view

• Definition:
• True and Fair is the term using in the audit report of financial statements
to express the condition that financial statements are truly prepared and
fairly presented in accordance with the prescribed accounting standards.
• For example, audit unqualified opinion of the financial statements stated
that the audited financial statements are true and fair view in all material
respect.
• That means after auditors perform their audit, they found no material
misstatements in the financial statements and that financial statements are
correctly prepared in accordance with the accounting standard as well as
applicable regulation.
• These words are not only used in the auditor report but also use in the
audit objective of the engagement letter.
• Meaning of true and fair view:
• Let break down into two words: True and Fair,
• True mean:
• The financial statements are free from any kind of
material right? No matter the material misstatements
are from error or fraud. The financial statements are
true when all kinds of errors are taking into accounts.
• Financial statements are truly prepared when they
are respected and followed by the accounting
standards and frameworks that the company is using
to prepare the statements.
• Fair view:
• It means that the financial transactions are treated
fairly as they should be and all significant
information is sufficiently disclosed in the
financial statements to ensure that the users are not
misleading.
• The fair view mainly focuses on the ways how the
quality of the information in the financial statements
is.
• For example, financial statements have enough
comparative information. Information that should
have been disclosed is disclosed.
• Meaning of present fairly
• Present Fairly here mean the same thing to True and Fair view. ISA 700
let auditor use both of these terms in the unqualified audit option if the
law in those jurisdictions required.
• That means in the audit opinion, the auditor could use a true and fair
view to express the audit opinion. But in case the local law required the
auditor to use present fairly, the audit allows to use of it and the meaning
is the same.
• Using of true and fair view and present fairly
• Auditors can use the phrase either “present fairly, in all material
respects,” or the phrase “give a true and fair view” in its opinion as
required by local law or local GAAP.
• If the local law required to use present fairly, then the auditor should use
this. But if the local law requires using other phrases, then the auditor
will need to assess whether that phrase still similar to ISA or not.
Thank you