As per LOS D, we are required to:
describe the objective of audits of financial statements, the types of audit
reports, and the importance of effective internal controls.
Financial statements of the corporations and other reporting entities are usually audited by the independent chartered accountancy firms of the accounting firms, in order to give a reasonable assurance as to the authenticity of the disclosures made by them; and that the financial reports present a true and fair view of the statements of affairs of the company. The audit is mainly conducted as per the guidelines and standards set by some board of federation incorporated for the purpose.
International standards for auditing have been developed by the International Auditing and Assurance Standards Board of the International Federation of Accountants. These standards have been adopted by many countries and are referenced in audit reports issued in those countries. However, some countries like the US have their own auditing standards. Public Company Accounting Oversight Board (PCAOB) was set up under the Sarbanes-Oxley Act, 2002 to overlook the matters regarding auditing in the country.
Thus under the International Standards on Auditing (ISA), the main objectives of conducting an audit are:
a. To obtain:
i. the reasonable assurance
ii. as to whether the financial statements of the reporting entity as a whole are free from material misstatements,
iii. whether due to fraud or error, and
iv. in accordance with the applicable financial reporting framework.
b. To provide an auditor’s report based on their findings, in accordance with the reporting requirements of ISA.
2.1. Types of Audit Reports
Depending upon the degree of assurance that the financial reports of the reporting entity are providing, there are two types of audit reports. These are:
a. Unqualified Opinion. An unqualified opinion is issued by an auditor when he is reasonably satisfied that the financial statements:
i. present a true and fair view of the statement of affairs of the entity;
ii. the risk of material misstatements is at an acceptable level; and
iii. that the books of accounts are prepared within the limitations of the accepted financial reporting framework.
b. Qualified Opinion. When the auditors are not reasonably assured about the authenticity of the financial statements as discussed above he can qualify their opinion. There are basically two types of qualifications an audit report can have. They are:
i. Disclaimer of an opinion. This is usually given when the auditor has a doubt over the fairness or authenticity of accounts owing to the limitation on the scope of the audit (whether imposed by the auditee or otherwise).
ii. Adverse Opinion. The adverse opinion is given by the auditor when the audit process reveals that there were material misstatements in the financial statement of the company and there are departures from the accepted financial reporting standards.