An audit report is a formal opinion, or disclaimer thereof, issued by either an internal auditor or an independent external auditor as a result of an internal or external audit, as an assurance service in order for the user to make decisions based on the results of the audit. It is a written letter from the auditor containing their opinion on whether a companys financial statements comply with generally accepted accounting principles (GAAP) and are free from material misstatements. The audit report is important because banks, creditors, and regulators require an audit of a companys financial statements. The report is written in a standard format, as mandated by generally accepted auditing standards (GAAS) . The different types of audit reports include:
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Clean Opinion: This is the most common type of audit report, which means that the financial statements are fairly presented in all material respects and are in compliance with GAAP.
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Qualified Opinion: This type of audit report is issued when the auditor identifies a material misstatement in the financial statements, but the misstatement is not pervasive.
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Adverse Opinion: This type of audit report is issued when the auditor identifies a material misstatement in the financial statements that is both material and pervasive.
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Disclaimer of Opinion: This type of audit report is issued when the auditor is unable to express an opinion on the financial statements due to a lack of sufficient evidence or other limitations.
The typical audit report contains three paragraphs, which cover the responsibilities of the auditor and the management of the entity, the scope of the audit, and the auditors opinion of the entitys financial statements. The audit report provides a picture of a company’s financial performance in a given fiscal year, and investors analyze audit reports and base much of their investment decisions on information contained in the audit reports.
