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The Purpose Of An Audit Report

1315 words - 5 pages

In general financial statements represent a formal record of an entity’s performance over a certain period of time which contains useful information to shareholders to assist them in making decisions (IFRS, 2014). In recent years, a wide range of users including shareholders and investors are interested in financial statements such as competitors, lenders and so on. Hence the audit report is prepared to provide an independent examination and the expression of opinion on financial statements (Millichamp and Taylor, 2012). However whether the information that auditors faithfully present or the users can totally rely on might still be the big question. Nonetheless under rules and regulations set by accounting boards, audit reports show the external opinion on true and fair view of the company’s financial statements and reduce the “Audit Expectation Gap” (AEG).

Different users have different purposes when using audited financial statements (Millichamp and Taylor, 2012). IASSB chairman Arnold Schiller also argued that a quality and informative audit report is the one that delivers value to the entities’ stakeholders not just shareholders (2012). For example, the audited reports might give shareholders a picture of how profitable company is to see the potential growth and safety of their investment or lenders such as banks would be interested in the level of debt within a company and evidence that loans would be able to be repaid. Management is interested in analysing statements to measure the effectiveness of its policies and decisions, as well as government which would also be interested in determining the tax liability. Many people would prefer to use statements that have already been certified to make their decision due to the assurance of the audited financial statements. However, according to McKonell et al, the audit reports give the user the confidence to use the financial statements by providing reasonable assurance instead of absolute assurance (The CPA Journal 2014).

The main role of an audit report is to provide an independent opinion on the faithful representation of an organisation’s accounts and whether they have been prepared in accordance with the relevant rules and regulations (ICAEW). The Company Act (1985) also states that the auditor must report to the members on whether the financial statements show a true or fair view. Hence the audit reports shall contain all the main elements of true and fair view including relevance, freedom from bias and error, disclosure and materiality and so on.

With “relevance”, the users normally expect that the view given by auditor will give them relevant and timely information to make decisions (FRC and ACCA, 2013). For example, the audit report discloses the opinion on whether the method that a company measures its assets value is appropriate might be relevant to investors in confirming their prediction the future profitability of that company. However due to the limited scope for auditors when...

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