CHAPTER 5:

AUDIT

REPORT

Prepared by:

Zulaida Binti Mohamed

Commerce Department

Politeknik Kota Bharu

Learning outcomes:

Understand the nature of audit

report

Know the auditor’s responsibilities

DEFINITION OF AUDIT REPORT

Is a letter or document in which the auditors express his or her opinion about the financial

statements at the end of the audit examinations performed on the basis of the guidelines as

provided for under the audit standards (ISA) either the financial statements may reflect true

& fair view some other findings.

Unmodified/unqualified report

Modified/qualified report

TYPES OF AUDIT

REPORT :

common related to the financial statements of limited company

Objective issuing report to express opinion that the financial statements have no problem & it’s reflect a true & fair view

The report format should comply with requirements provided under ISA 700 and the Company Act 1965

Unmodified/unqualified report

REFUSE TO GIVE AN UNQUALIFIED OPINION

If the auditor believes

that there is a

reasonable chance

that the financial

statements are

materially misstated,

it would be a serious

breach of auditing

standards to issue an

unqualified opinion.

The audit

process

must have

some teeth

in it!

b. Modified/qualified report

1.cos’ the audit function is restricted shortage of time, appointment too late

2.There is lack of cooperation from the

management information & explanation not enough

No correction for misstatement in account or

inadequate or misleading

Violation of certain laws eg non-compliace with

Income Tax Act

- -

Overview and the situation each

type of reports being released

1. Unmodified/unqualified report

(true & fair view- free from misstatement)

– refer eg. m/s 192 ‘Understanding Auditing In

Malaysia’

2. Unmodified/unqualified report with

explanatory paragraph

(still true & fair view)

– refer eg. m/s 196 ‘Understanding Auditing In

Malaysia’

3. generally modified/qualified report issued

when financial statement do reflect a true

& fair view ‘except’ for factor which does

not satisfy by auditors such as:

a) Non-compliance with an

accounting standards

b) The law & regulations

c) Sufficient evidence can’t collected

– refer eg. m/s 198 ‘Understanding Auditing In

Malaysia’

4. Adverse report

Issued when financial statement found

to contain material misstatement &

misleading so not reflect true & fair

view

Eg preparing FS is not accordance with

GAAP & accounting standards – rare

happened

The auditor quite aware about condition

of the FS

– refer eg. m/s 199 ‘Understanding

Auditing In Malaysia’

5.Disclaimer report

Fail to collect sufficient evidence

to make conclusion & opinion

No cooperation from management

Serious shortage time

– refer eg. m/s 201 ‘Understanding

Auditing In Malaysia

Elements in the audit report

1. The title

2. The party to whom the report is

directed or addressed

3. Introductory paragraph

4. Scope paragraph

5. Opinion paragraph

6. Name of the auditor or audit firm

7. Address of audit firm

8. Date of the audit report

The auditor’s responsibilities

The auditor’s responsibilities:

1. Under Common Law In all cases, auditors must carry out their

duties with reasonable care & skill

eg: London & General Bank

The auditor may depend on the

confirmation made by the company’s

management in cases where there are

nothing to arouse the auditor’s suspicion

Eg: the value of inventories are acceptable

if in his examination has shown the

inventory system & procedures are in good

order not in doubt

Eg : Kingston Cotton Mill co.

2. In planning the audit

Auditor should plan & desing

the audit so as to obtain

reasonable assurance that the

financial statements are free of

material misstatements

ISA 240 misstatements involve:

-errors (occur by accident- without any

intention on the part of the employee to

cheat)

-fraud occur with the intention of

cheating for the benefit of the party

committing them

- two types of fraud:

i.fraudulent financial reporting

ii.Theft or defalcation of company

assets

EXTERNAL AUDITOR RESPONSIBILITY

Current auditing standards require that independent auditors provide

reasonable assurance that the financial statements are free from

material misstatements, whether caused by error or fraud, to render an

unqualified opinion on the financial statements.

External auditors are not and should not be expected to provide

absolute assurance regarding reliability of financial statements, but the

public expectations concerning external auditors performance are high.

Users of audited financial statements generally expect external

auditors to detect financial statement fraud and employees’ illegal acts

and fraud, which affects the integrity of financial reports. External

auditors, however, are more concerned with material misstatements in

the audited financial statements.

TQ