Two things that might surprise you about an audit report

Two things that might surprise you about an audit report

If you read one thing in the audit report, either in the annual report or with a set of financial statements, it’s probably the section headed ‘Opinion’.  And in most cases auditors will say there that ‘the financial report presents fairly, in all material respects’ or ‘gives a true and fair view of’ the financial position, financial performance and cash flows of the organisation.  And you say to yourself  ‘Oh good, everything’s OK.’    Maybe, maybe not.  Here’s two things that most people don’t realise about such an opinion.

It’s not a clean bill of health for the organization

In fact it’s not an opinion on the organisation at all.  It’s a report on the financial report, not on the organisation itself. (And on the financial report, not its components.)

So if you are trying to assess the health of the organisation, or some aspect of it – and that would be normal – then what you should do is to take that report, and the opinion, and put them together with other information about the organisation and form your own opinion.

But even with the auditor’s opinion on the financial report, there’s something you need to realise.

It’s not even a clean bill of health for that report

This is not a criticism of your auditor, it’s just the nature of an audit. You see, when we say ‘presents fairly, in all material respects’ or ‘gives a true and fair view of’, we are not saying that the information is correct and unbiased, but that it is materially correct and unbiased.

Because of the processes involved in both the production of the report, and its audit, it is highly likely that there are misstatements in the report.   ‘Materially’ here means that the auditor has decided that any such misstatements should not affect the decisions you make based on the report. It’s about the decisions you make, not the accuracy of the report.

Not only this, but because of the inherent limitations of an audit, there is a chance that there are not only immaterial misstatements in the financial report, but also material misstatements.  But this risk is low enough to allow us to issue a clean opinion.

What we are saying is that the report is accurate enough. In audit language, it provides ‘reasonable assurance’ rather than absolute assurance.

The bottom line is that you should take the audit opinion for what it is: an opinion on the financial report as a whole, a report that is now part of the history of the organisation, and an opinion that the risk of undetected material misstatements in that report is low.  Therefore you’ll need more than the audited financial report if you are considering a significant transaction with the organisation.

3 thoughts on “Two things that might surprise you about an audit report

  1. Dianne Clemens

    Well said, I hadn’t actually looked at the audit report terminology that way before. Although I always thought that it was quiet brave of an audit to make the state based on an annual visit and audit of the organisation without knowing of any financial issues that have arisen throughout the year.

  2. Mark Richardson

    Well done Ted and good to see that it has helped to enlighten (at least one person).

    My experience indicates that for those organisations with less than ideal control systems, then the Auditor is obliged to undertake additional work (substantive tests) to satisfy themselves that the opinion given is appropriate. In short, for those organisations an unqualified opinion is more reliable (to the extent that it is less likely that a material misstatement).

    In my younger years as auditor, there were many audits where the Audit Partner did not want to conduct a compliance based Audit (a reliance on the organisations controls) and instead insisted on a close to a 100% substantive based Audit. However, materiality (around 5% of total revenue and/or assets) did play a part in leading to an unqualified Audit opinion.

  3. Lance T Stone

    Thanks Ted for this analysis. The complexities of the English language continue to challenge as always.
    A much greater emphasis in the “Opinion” section of an audit report is when there is a “Qualification” statement.
    This rings warning bells loud and clear and can seriously impact the organisations financial viability. Certainly financial institutions and the ATO get very nervous when this occurs. It can also be detrimental in the not for profit sector when the organisation is submitting tenders for work.
    In my experience having this type of wording limits the capacity of the organisation to recover financially and potentially be the coup de grâce for the business unless there are stringent administrative processes implemented very quickly.

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