Preparing for a business audit can save your organisation time and money. An audit doesn’t have to disrupt your business: it can effortlessly form part of your operational processes and not impose many additional demands on your resources.
Our top tips for preparing for a business audit include:
- Prior planning prevents poor performance
- Ensure accounts are reconciled before an audit of your financial statements
- Identify significant changes which may affect the process of your financial audit
- Designate a key contact in the preparation of a financial audit
- Professional development and training
- Ask questions about your financial audit
- Learn from the experience
What Is an Audit: A Refresher
An audit is a reasonable assurance engagement where the auditor provides an opinion about whether a company’s financial report is prepared in accordance with particular requirements or legislative framework (e.g. the Corporations Act 2001 or the Australian Charities or Not-for-profits Commission Act 2012). This includes giving a true and fair view of the financial position of a company at year end, and of its financial performance for the period ending on that date, and complying with Australian Accounting Standards and certain legislative requirements (e.g. Corporations Regulations 2001 or Australian Charities or Not-for-profits Regulation 2013).
Many other types of entities are also required to have their financial report audited, including unlisted companies over a certain size threshold and large charities.
You can read more about the distinction between assurance services here.
What information is audited and supported by the audit report?
Only certain sections of a company’s annual report are audited. The auditor’s report provides an opinion on the financial report, which comprises the financial statements, the notes to the financial statements and the directors’ (or responsible entities’) declaration.
As the directors’ (or responsible entities’) report is intended to complement and support the financial report, it may appear to be part of the audited financial information. It is important to note however, that although the information provided in the directors’ report is not audited (with the exception of the remuneration report of listed companies) the auditor still needs to consider and report on whether it contains material inconsistencies with either the financial report, knowledge gained through the audit, or appears to be materially misstated.
What is the result of an audit?
The result of an audit is the auditor’s opinion which is included in the audit report. An audit report is a document that auditors attach to the statutory audit report that reflects their opinion of the audit. The audit report also contains a range of other information to explain the context in which that opinion has been reached. Similarly, an auditor’s review report contains the auditor’s conclusion on the financial report, which provides a lower level of assurance than an opinion, and also explains the context in which that conclusion was reached.
What Information Does an Audit Report Include?
An audit report , which is appended to the financial report, includes the following information:
- Title and addressee
- Auditor’s opinion (More on this later!)
- Basis for the opinion, which includes important information about the auditor’s opinion, including:
- That the audit was conducted in accordance with Australian Auditing Standards:
- A reference to the section of the auditor’s report that describes the auditor’s responsibilities under the Australian Auditing Standards;
- A statement that the auditor is independent of the company in accordance
- The relevant ethical requirements and fulfilment of the auditor’s other ethical responsibilities
- A statement whether the auditor believes that the audit evidence they obtained is sufficient and appropriate to provide a basis for the auditor’s opinion.
NOTE: When the auditor modifies the opinion on the financial report, the heading ‘Basis for Opinion’ is amended in accordance with the type of modified opinion (see modified auditor’s opinions below) and within this section, the auditor includes a description of the matter giving rise to the modification.
Key audit matters
For listed entities, Key Audit Matters (“KAMs”). These are matters which are, in the auditor’s professional judgement, of most significance in the audit. KAMs are selected, in consultation with the directors or audit committee, on the basis of needing significant auditor attention in performing the audit. The reasoning for this may include areas of higher assessed risk of material misstatement or significant judgement and estimates. The KAM section includes, at a minimum:
- Why the matter was considered to be a KAM
- Reference to the related disclosure
- How the matter was addressed in the audit.
- Responsibilities for the financial report
- Auditor’s Responsibilities for the Audit of the Financial Report
- Other Reporting Responsibilities.
Types of Audit Report Opinions
Auditors have the option of selecting amongst four different types of auditor opinion reports.
Unmodified Opinion (Clean Opinion)
Auditor’s reports containing an unmodified auditor’s opinion are the most common type of report a user is likely to come across. This is in part because management usually addresses most of the matters which the auditor has raised by adjusting the financial information or including further disclosures when finalising the content of the financial report before it is issued. An unmodified auditor’s opinion, also referred to colloquially as a “clean” audit opinion, for a public company in Australia will state that in the auditor’s opinion the financial report is in accordance with the Corporations Act 2001, including giving a true and fair view, and complying with accounting standards and the Corporations Regulations 2001.
Even where there is a clean opinion, it is important to look for and pay attention to the KAMs raised and any Emphasis of Matter, Other Matter or Material Uncertainty relating to Going Concern paragraphs. These additional paragraphs highlight matters of significance contained in the financial report and contribute to the overall understanding of the report.
An unqualified opinion is considered a clean report. This is the type of report that auditors give most often. This is also the type of report that most companies expect to receive. An unqualified opinion doesn’t have any kind of adverse comments and it doesn’t include any disclaimers about any clauses or the audit process. This type of report indicates that the auditors are satisfied with the company’s financial reporting. The auditor believes that the company’s operations are in good compliance with governance principles and applicable laws. The company, the auditors, the investors and the public perceive such a report to be “free” from material misstatements (emphasis added).
Modified auditor’s opinions are issued in circumstances when the auditor believes the financial report contains a material misstatement, or when the auditor is unable to obtain enough evidence to form an opinion. Such an opinion should be a red flag for readers, as it indicates that part or all of the financial report cannot be relied upon.
If the audit opinion is modified it can be either a Qualified opinion or an Adverse Opinion.
If you’ve ever wondered “what is a qualified audit report?” then this one is for you. A clean opinion is provided “except for” the matter identified. This might occur when an auditor isn’t confident about any specific process or transaction that prevents them from issuing an unqualified audit report. Auditors write up a qualified opinion in much the same way as an unqualified opinion, with the exception that they state the reasons they’re not able to present an unqualified opinion. An example where a qualified opinion might be issued includes where a company didn’t conduct a stocktake on inventory, or didn’t recognise and present its investments at fair value in accordance with Australian Accounting Standards.
The auditor cannot provide an opinion because the auditor has not been able to obtain sufficient appropriate audit evidence to provide a basis for that opinion. When an auditor issues a disclaimer of opinion report, it means that they are distancing themselves from providing any opinion at all related to the financial statements. Some of the reasons that auditors may issue a disclaimer of opinion are because they felt like the company limited their ability to conduct a thorough audit (also known as a management-imposed scope limitation) or they couldn’t get satisfactory explanations to their queries or information requests (for example, where records might have been destroyed by natural disaster). Importantly, a disclaimer of audit opinion signifies that the effects on the financial report are likely to be material and pervasive. Accordingly a disclaimer of opinion is often interpreted as a severe position and consequently it potentially creates an adverse image of the company.
The final type of audit opinion is an adverse opinion. Auditors who aren’t satisfied with the financial statements or who discover a high level of material misstatements or irregularities know that this creates a situation in which stakeholders (including investors, suppliers, customers and even the government) will mistrust the company’s financial reports. An auditor’s adverse opinion is a considerable red flag. An adverse audit report usually indicates that financial reports contain gross misstatements. There is also a higher susceptibility to the potential for fraud. Adverse opinions send out a high alert that the company’s records haven’t been prepared according to accounting principles or the law. Financial institutions and investors take this opinion seriously and will reject doing any kind of business with the company. Auditors use all types of qualified reports to alert the public as to the transparency, reliability and accountability of companies. Unsurprisingly, companies, investors and the public highly value unqualified audit reports.
Bishop Collins – The Audit Experts
It’s simple; with Bishop Collins Accountants, there are no surprises. We listen. We educate. We deliver. If you would like to discuss your organisation’s external audit requirements, the accounting experts at Bishop Collins would be delighted to have an obligation-free and confidential discussion with you. We provide solutions beyond compliance and help you to protect your assets and move toward achieving your goals. Get in touch with us today to see how we can help!