Auditing of organizational processes is carried out to check the efficiency of the system, the practices that are being followed and to investigate the company records, operations and functioning of the individual departments. Auditing is done to ensure that the objectives or goals of the company are being met and that the major functions like finance, manufacturing, quality, project management etc. are running as per the standards set. If you are a financial auditor, a quality management professional or running an auditing firm, you will be aware of the different certification standards and industry compliance laws that are required to conduct various kinds of audits. Our discussion highlights the importance of auditing and explains how to write an audit report by means of a sample audit report. You can learn more about financial accounting and creating audit reports with this introductory course.
What is Auditing?
Auditing is simply the process of evaluating a company’s internal functions for their effectiveness and compliance, in an independent manner. It helps a business in understanding the areas of improvement and analyze what’s working for them and what’s not. Auditing could be internal or external in nature; when the auditors belong to the organization’s internal body say for example, an audit committee of the board of directors, then the auditing is an internal one. Whereas, when an external agency or a government body is involved in the auditing, then it’s known as external auditing. Whether it’s an internal or external audit, the auditors must be allowed to conduct assessments independently and given complete freedom to check the processes according to the given rules and regulations. Check out this course on SAP auditing, which will give you more insights on the audit process and objectives.
What is an Audit Report
An audit report basically summarizes the findings of the audit conducted, points out the issues and suggests remedial actions, and also reflects the action plan suggested by the management of the company. Audit reports are generally structured around the following five important elements:
- Condition: describes the problem in the process, found during the audit
- Criteria: indicates the criteria that was not met (e.g. a quality standard, a company policy document, accounting policies etc.)
- Cause: reason for the problem in the process
- Consequence: what can the problem lead to? (negative outcome/ risk)
- Corrective Action: what can the management do to correct the problem? (And by when?)
Remember, the purpose of an audit is not a deliberate fault-finding but an efficient way to set right the company processes if they are not being followed correctly. Audit reports must be taken seriously by companies as they present them with opportunities for improvement. They are essential tools that help a business in achieving its objectives and move towards continual growth.
Elements of Audit Report
The basic elements of an auditor’s standard report on a company’s financial audit are:
- A title that includes the word ‘independent’
- A statement that the financial statements identified in the report were audited
- A statement that the financial statements are the responsibility of the company’s management and that the auditor’s responsibility is to express an opinion on the financial statements based on his or her audit
- A statement that the audit was conducted in accordance with the generally accepted auditing standards and an identification of the United States of America as the country of origin of those standards. Find out more on audit compliance with this course.
- A statement that those standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement
- A statement that an audit includes
– Examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements
– Assessing the accounting principles used and significant estimates made by management
– Evaluating the overall financial statement presentation
- A statement that the auditor believes that his or her audit provides a reasonable basis of his or her opinion
- An opinion as to whether the financial statements present fairly, in all material aspects, the financial position of the company as of the balance sheet date and the results of its operations and its cash flows for the period then ended in conformity with generally accepted accounting principles. Learn more about financial statements with this course on basic accounting.
- The manual or printed signature of the auditor’s firm
- The date of the audit report
Audit Report Sample
Having understood the basic elements of an audit report, let us now understand the details more with the help of a sample financial audit report as described below:
Example: Financial audit report of XYZ Company
Report on XYZ Company’s Financial Statements
Independent Auditor’s Report
Report on the Financial Statements
We have audited the financial statements of XYZ, comprising of the balance sheet as on 31 December 2013, cash-flow statement and income statement for the year 2012-13. We have also referred the accounting policies and other documents of the Company Record ABC.
Management’s responsibility for the financial statements
The directors of the company are responsible for the preparation of the financial statements so as to give a true and fair view in accordance with the accounting principles generally accepted in the United States of America. The directors are also responsible for the internal control as defined by the management to enable preparation of the financial statements that are free from any misstatements, whether due to fraud or error.
Our responsibility is to express our opinion on the financial statements of your company based on our audit. We have conducted the audit in an independent and fair manner in accordance with the auditing standards of the United States of America and the standards applicable to financial audits. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatements.
We have followed the procedures mentioned in our detailed audit plan to collect evidence about the disclosures made in the financial statements and have made the necessary risk assessments based on our judgement and experience. We believe that the evidence so collected during our audit is sufficient to formulate our audit opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the Company XYZ as of 31 December 2013 and its performance and cash flows indicated are in accordance with the accounting principles generally accepted in the United States of America.
Report on Other Legal and Regulatory Requirements
In accordance with the auditing standards of the United States of America, we have also issued our report dated [date of report] on our consideration of Company XYZ’s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance the auditing standards of the United States of America in considering XYZ’s internal control over financial reporting and compliance.
This report is made solely to the members of the Company XYZ, as a body, in accordance with the auditing standards of the United States of America and for no other purpose. We do not assume responsibility to any other person for the content of this report.
[Auditor’s City and State]
[Date of the Auditor’s Report]
Note: The auditor’s report is based on the company’s financial statements- balance sheet, statement of income, statement of retained earnings and statement of cash flows. Each financial statement that is audited must be specifically identified in the introductory paragraph of the auditor’s report.
This is a sample report on the financial audit of a business entity. There are other financial audit report formats for government institutions, not-for-profit organizations etc., which are similar in nature but with slight differences based on the auditing or accounting standards.
In case of an audit on the quality management of an organization or an operational audit, the auditor would give a list of non-conformance, if any, and suggest corrective actions for each of them. Thereafter, the management would indicate its commitment on resolving the issues by accepting the recommendations and mentioning the action plan along with the completion date.
To conclude, audit reports vary based on the kind of audit, the processes involved and objectives of the audit itself. If you are the owner of an audit firm or run a business, it’s essential for you to understand the importance of a good auditing system, the best practices in the industry and the motivation to achieve overall business excellence.