What is an audit?
An audit refers to the independent investigation of any entity’s financial information, whether profit-oriented or not, regardless of its size or legal form when such an inspection is undertaken with the intent of expressing an opinion on it.
In simple words, an independent party inspects your financial reports to check all your activities are verified and recorded. The report is a testament that your business is true and fair and follows all standards and regulations. This helps in maintaining reliability among stakeholders and they are likely to fund your business.
Almost every company has its financial statements, such as the income statement, balance sheet, and cash flow statement audited once a year.
Who carries out the audit?
An impartial external auditor usually audits a company’s financial statements.
Internal auditing can also be carried out by employees or department managers.
Chartered accountants from the Institute of Chartered Accountants of India, or ICAI, can conduct independent audits of any organization in India.
What are the types of audits?
While there are various types of auditing a small business can carry out, these 3 types of auditing are fundamentally significant. They are
a) Internal Audit
Internal auditors work for the company or organization they’re auditing, and the audit report they prepare is delivered directly to management and the board of directors.
In some cases, a company might require a consultant auditor when it does not have the resources in-house to audit specific aspects of its operations.
Consultant auditors go by the company’s standards that have hired them to audit.
Internal audits can be used by businesses with shareholders or board members to keep them informed about their finances. Internal audits are also a suitable tactic to keep track of financial objectives.
b) External Audit
The accountant or the agency hired is a third party in an external audit. The external auditor is independent of your company.
External auditors are also required to adhere to generally accepted auditing standards (GAAS).
Audits conducted by third parties can be immensely beneficial in removing any bias from an assessment of a company’s financial statements.
These financial audits are conducted to determine whether the financial statements include any discrepancies.
External auditors work to a separate set of standards than the firm or organization that hired them to conduct the job.
External audits are commonly required by shareholders and creditors to check the accuracy and fairness of a company’s financial information and data.
3) IRS Tax Audits
The IRS conducts tax audits to determine the integrity of your company’s tax returns. Auditors seek for inconsistencies in your company’s tax liabilities to ensure that it didn’t overpay or underpay taxes. Furthermore, tax auditors examine your small business tax return for potential problems.
There’s a common prejudice attached to IRS audits. They are usually presumed to be viewed as proof of the taxpayer’s misconduct. But that’s not the case. Being chosen for an audit, however, is not always a sign of misconduct.
IRS audits are typically performed at random by auditors. Audits by the IRS can be done by mail or in person.
What are Audit Reports?
An audit report expresses the auditor’s opinions of a company’s financial standing after a careful audit process. It specifies if the company’s accounting reports comply with the GAAP.
Audit reports verify that the financial reports such as income statements, cash flow statements, or the balance sheet are free of substantial discrepancies.
In most cases, the audit report is supplemented by the company’s annual report. Banks, financial institutions, shareholders, lenders, and important authorities all require the audit report.
Important terms to understand here are-
- Materiality- Concerned with the severity of the misstatement or its consequences.
- Pervasiveness- The scope or degree of the misstatement, or how many financial statements have been affected by the misstatement.
The Four Categories of Audit Reports
1) Clean or Unqualified Report
These reports indicate that-
- The financial statements are fully prepared in compliance with the GAAP
- The financial statements don’t have any material misstatements.
This is the best form of report an auditor can give to a business as it indicates that the auditor is satisfied with the company’s financials.
It comes under unmodified opinion.
2) Qualified Report
In this case, the auditor is either unable to collect any evidence of misstatement or obtains proof that the financials are misstated but the situation is not pervasive.
The auditors will normally specify in the reports the problem areas where there has been a computation error. This allows the company to rectify the mistakes.
With cloud accounting software, there’s no scope for calculation errors.
3) Adverse opinion
When the auditor obtains evidence that the misstatement is both material and pervasive, it is referred to as an adverse opinion.
An audit report with an adverse opinion is the worst report you can obtain. It harms a company’s reputation and potentially results in legal consequences if the problems are not resolved.
There’s a chance the errors were introduced by accident, but they might also be the consequence of fraud. If the company’s officers receive a negative opinion as a result of illicit conduct, they may face criminal penalties.
As a result of the audit report’s adverse opinion, shareholders might withdraw or reject the company.
4) Disclaimer of opinion
Due to limits imposed by management, natural calamities, or extraordinary circumstances, the auditor is unable to gather any proof with respect to material and pervasive misstatement.
This can happen if the auditor is unable to be unbiased or is refused access to specific financial information.
The financial status of the company could not be determined, according to a disclaimer of opinion.
Essential Contents of an Audit Reports:
- Title
- Addressee
- Introduction
- Responsibilities of directors and auditors
- Opinion
- Basis of opinion
- Other reporting responsibility
- Signature of the auditor
- Date and place
How can RealBooks help you in the audit reports process?
- It provides all the details of the company through its comprehensive dashboard.
- It generates all accounting reports in a matter of seconds
- It contains proofs of invoices through its document attachment feature
- It is compliant with GST
- It is cloud-based, hence, it has no room for errors
- It allows you to view important reports anytime and anywhere
- It sends notifications and alerts for collection as well as payment of dues
- It can store reports of all your branches in an individual as well as a consolidated manner
- It is secure
Need to make your audit season smooth? You can rely on the online accounting software to make your auditing task hassle-free.