What is an Audit Report?
An audit report of a company is the auditors' formal opinion about the reliability of the organization's financial statements. The auditor can be either internal or an independent external one. He/she checks if the preparation of the company's financial reports follows the Generally Acceptable Accounting Principles (GAAP) or other reporting frameworks e.g. IFRS, UK, etc. The audit report assesses the financial statements' validity and credibility. Hence, it must be included in the company's financial report. The importance of an audit report is that it ensures that there are no material errors in an organization's financial statements. However, it must be always remembered that the report is merely an opinion and not an evaluation of any kind. This was the audit report definition in a nutshell.
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Contents of the Audit Report of a Company
Now since we know the importance of an audit report, let us move on to what an audit report of a company includes.
In the contents of the audit report, the auditor prepares the report on the financial statements and accounts of the company to the best of his knowledge and information. Later, he/she presents the annual report auditors report before the organization in the general meeting.
The Specimen of the Audit Report
During auditing, the auditor might be unable to collect any information. In this case, he has to include the details and nature of the missing information and also the effect of its absence in the report.
It is the solemn duty of the auditor to state if proper accounts, as mandated by law, have been kept by the company.
The auditor has to include all the reports audited by a person other than the company's auditor in his final report.
The auditor has to ensure that every director is eligible to be appointed as a director.
The annual report auditors report must contain the auditors' comments on financial transactions. The auditor must also include his observation on matters which might adversely affect the functioning of the company.
The auditor opines if the financial statements follow the existing auditing and accounting standards.
The auditor ensures that the profit loss account and the company's balance sheet mentioned in the report are according to the account books and returns.
Every deficiency, qualification, and reservation related to the account books must be included in the report.
Components of the Auditor's Report
Every audit report of a company follows a standard format, as mandated by the Generally Accepted Auditing Standards (GAAS). An audit report generally consists of three paragraphs.
The first paragraph mentions the duties and responsibilities of the directors and auditors.
The second paragraph mentions the scope. It states that the report was prepared following a set of standard practices.
Finally, the third paragraph contains the opinion of the auditor.
At times, a fourth paragraph is also present. Here, the result of another audit on another function of the entity is mentioned. However, the investor mainly focuses on the third paragraph, where the auditor's opinion is stated.
Audit Report Under Companies Act 2013
The Companies Act, 2013 requires that companies appoint an auditor. Besides, it also states the procedure of the appointment of an auditor. The Act lays down the various duties and responsibilities of the auditors. An audit report has a lot of value; hence proper steps must be taken in order to ensure that the audit is done without any error.
The Duties and Responsibilities of Auditors
Auditors can access the account books and vouchers of the auditee company anytime. It does not matter whether the said documents are at the registered office or anywhere else.
Auditors have the right to access the records of the subsidiary company. These records are essential for consolidation purposes.
Auditors have the right to be informed of a general meeting. He may attend it in person or through his authorized representative, who is also qualified to be an auditor.
An auditor has the right to receive information about such matters, which are necessary for performing his duties.
FAQs on Audit and Auditors: Companies Act, 2013 Overview
1. What is a statutory audit as defined by the Companies Act, 2013?
A statutory audit is a legally required review of the accuracy of a company's financial records. Under the Companies Act, 2013, it is a mandatory, independent examination of the financial statements to ensure they present a true and fair view of the company's financial position. This audit must be conducted by a qualified, independent auditor, and the findings are presented in an audit report to the company's shareholders.
2. Who is qualified to be appointed as a company auditor under Section 141?
As per Section 141 of the Companies Act, 2013, only certain individuals or firms can be appointed as an auditor. The key qualifications are:
- The person must be a Chartered Accountant holding a valid certificate of practice.
- A firm can be an auditor if the majority of its partners practicing in India are qualified Chartered Accountants.
- In the case of a Limited Liability Partnership (LLP), only the partners who are Chartered Accountants are authorised to act and sign on behalf of the firm.
- The auditor must not have any of the disqualifications mentioned in the Act, such as being an employee or officer of the company.
3. How is the first auditor of a company appointed differently from subsequent auditors?
The appointment process for the first auditor and subsequent auditors under the Companies Act, 2013, has key differences:
- First Auditor: In a non-government company, the first auditor is appointed by the Board of Directors within 30 days of the company's registration. If the Board fails, the members (shareholders) must appoint the auditor within 90 days at an extraordinary general meeting (EGM).
- Subsequent Auditors: All subsequent auditors are appointed by the members (shareholders) at the first Annual General Meeting (AGM). The appointed auditor then holds office from the conclusion of that AGM until the conclusion of the sixth AGM.
4. What are the key powers and duties of an auditor as listed in Section 143 of the Companies Act?
Section 143 of the Companies Act, 2013, grants auditors significant powers and imposes several duties. Key among them are:
- Powers: The auditor has the right to access the company's books of accounts and vouchers at all times and can require information and explanations from company officers.
- Duties: The primary duty is to make a report to the members on the financial statements. The auditor must state whether the accounts give a true and fair view, comply with accounting standards, and report on specific matters like the adequacy of internal financial controls. They also have a duty to report any discovered fraud to the Central Government.
5. What is the practical difference between a qualified opinion and an adverse opinion in an audit report?
Both indicate problems in the financial statements, but they differ in severity.
- A qualified opinion is issued when the auditor finds misstatements that are material but not pervasive. This means there are specific issues, but the overall financial statements are still reliable. It essentially means "the financials are fair, except for these specific matters."
- An adverse opinion is the most severe. It is issued when misstatements are both material and pervasive, meaning the financial statements as a whole are misleading and do not present a true and fair view. This opinion signals to stakeholders that the financials are unreliable.
6. What happens if an auditor discovers fraud during an audit?
If an auditor, during the course of their duties, has reason to believe that a fraud involving an amount of ₹1 crore or more has been committed against the company by its officers or employees, they have a strict reporting obligation. As per Section 143(12), the auditor must immediately report the matter to the Board or Audit Committee. Within 45 days of receiving a reply from them, the auditor must forward their report on the fraud to the Central Government. For frauds less than ₹1 crore, the matter is reported only to the Audit Committee or the Board.
7. Why are certain services, like bookkeeping, prohibited for a statutory auditor to provide to the same company?
The prohibition of certain non-audit services, as listed under Section 144 of the Companies Act, 2013, is designed to protect the auditor's independence. If an auditor also performs services like accounting, internal audit, or investment banking for the same company, it creates a conflict of interest. The auditor might be hesitant to find errors in work they themselves performed, or their objectivity could be compromised. This separation ensures the audit is an unbiased, external check, which builds trust among shareholders and the public.
