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What to read in Auditor's report, How to read Auditors report?

How to read an Auditor’s report

People used to see, various parameters in fundamental analysis of the financial statements, and those of one parameter is Auditor’s report in annual report of the company.

What to read in Auditor's report, How to read Auditors report?

Auditor’s report is an independent report written by one auditor appointed by the company, done to ensure the validity of the financial statements which is free from any material misstatements.

Why Auditor's report is necessary?

Auditor is the representative of the shareholders who went to check the authenticity and validity of the information given in the financial statement and to write his own view on current running status of the company.

If company will not appoint an auditor, then they must show the financial statements authenticity to every shareholder if he/ she wants to have it, and if even a single person gone like that, they will have gone mad.

So, this whole process is executed in such a way to make things systematic for the company.

How is auditors report executed?

In annual general meeting of the company, companies appoint the auditor who is going to make the report for them (Most of the time meetings are scheduled in May). Company may appoint the auditor for the maximum of five years, if they wish otherwise most of the company appoint for the auditor for 1 year only.

The condition for being the auditor is that,

  • he/ she will not be the employee of the company,
  • not previously the member of the company, and
  • completely independent for making any statements against the company based on his judgement.

4 types of auditor's report

The auditor can prepare his report under the 4 categories:

  • Clean or unqualified
  • Qualified opinion
  • Adverse opinion
  • Disclosure of opinion

Based on the information provided by the management, the co-ordination of the management in smooth conduction of process and the faults in the company, you may classify it with 4 types.

Clear or unqualified

This is the report you want to see again and again; it clearly signifies that the documents and the information provided are according to the IndAS (Indian accounting standard) and is found true and fair. The report provided by the auditor is free from any kind of material misstatement.

Qualified opinions

It tells the reader that the financials are audited, and the auditor had found nothing wrong with the documents, but the documents are not set according to the generally accepted accounting standard (GAAS) set by Indian accounting standard (IndAS).

According to qualified opinions the company has maintained the validity of the documents and financials but are not set according to the principals set by the government.

What to read in Auditor's report, How to read Auditors report?

Adverse opinions

Adverse opinion is the type of report which you never want to face while doing analysis of financials, as it states that

  1. the documents and information are not set according to the generally accepted accounting standard set by the Indian accounting standard
  2. The auditor has found mismatch in the data provided by the company and what he obtained from his research
  3. Also, the auditor is materially misstated by the management of the company.

This is worst case auditor report for the company.

One of the examples of this opinion is Satyam scam for making the audit in favour of the scam.

These three of the four reports stated above are more popular, but there is another type which is uncommon among the auditor reports which is

Disclosure of opinions

This type of auditor report states that for any of the reason the auditor is unable to complete his audit, and the reason for this opinion can be any, but it is not given in public (shareholders, media, and company). The reason for the same is given to the government agency maintaining the smooth conduct of the audit.

The reason can be:

  • The management can be materially misstating the auditor, not providing the reasonable to the auditor
  • The management is forcing auditor manipulate his writings in his reports.

The reason why auditor has not made his statements public is because he can entitle to case of defamation by the company.

What is Auditor's report?

There is one standard according set by Indian accounting standard (IndAS)to which the auditor must complete his audit.

The auditor should order his audit accordingly, the order for the auditing is:

  1. Introduction
  2. The company is audited, and accounting system is of the type-
  3. Basis of opinions
  4. Key audit matters
  5. Other information
  6. Management responsibilities for the financial statements
  7. Auditors’ responsibilities
  8. Date
  9. Place
  10. Time
  11. Signature of auditor

Typically, the whole auditors report is contained in three paras, first will contain the opinion of the auditor, second will constitute of the key audit matters and other useful information and the last one the third para will talk about the managements and auditors’ responsibilities.

Introduction

the introduction para will start from the line “We have audited the company “ABC public limited” and had found all the information present in financial statements of the company as "true and fair”.

For fast reviewing you must search for the line true and fair, if you have found the line true and fair then you can move forward to the next para because for the fast review of the auditor’s report what an investor wants is the line that true and fair in first para.

The first para also talks about the opinions of the auditor whether the opinion is unqualified, qualified, adverse or disclosure of opinions.

Key audit matters

This section will be covered in the second para of the audit, where the auditor writes about the features and information which an investor or a shareholder must know, and which are not related to basic accounting.

Like the reason for which an auditor has been appointed is that to match the validity and the authenticity of the financial statements provided by the company.

But in this section the auditor writes about the issues which can indirectly hinder the financial stability of the company’s financial assets.

Like in one auditor’s report I came across the key audit matters where the auditor has written that most of the company reserve and surplus contained of the account credits or account receivable.

So, this issue is not directly hindering the financials of the company but can came out a big issue if that receivable somehow has not been received in coming future.

Responsibilities

As from the name the third para will talk about the certain responsibilities that management as well as the auditor must take care of,

The bottom line

Auditor report is one of the main reports which tells about the in hidden secrets of the company, as an investor you must check the report for the better fundamental analysis of financial statements of the company.

You do not need to check it thoroughly, there are certain line which you can check being an investor

  • First check for the statement true and fair if this line is there, then you can confirm it with unqualified or clean opinions
  • Then go through key audit matters and check if there is any issue or loophole which auditor wants to convey about in the audit.
  • Also check the other information section where some more useful information can be found.

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