Auditing: types of reports, disclosure checklists, management representation letters

Solution Preview

An auditor's report is considered an essential tool when reporting financial information to users, particularly in business. Since many third-party users prefer, or even require financial information to be certified by an independent external auditor, many auditees rely on auditor reports to certify their information in order to attract investors, obtain loans, and improve public appearance. Some have even stated that financial information without an auditor's report is "essentially worthless" for investing purposes.

The most common auditor's report in the world is an external auditor's report on an auditee's (usually, but not exclusively, a company's) financial statements and its accompanying notes. This auditor's report is intended to advise investors, the government, and other users on whether the auditee's financial statements have been prepared in accordance with Generally Accepted Accounting Principles (GAAP), whether they are free of material misstatement (e.g. free of important and significant errors), and whether they show a true and fair view of the operating results, financial position and cash flows of the auditee. In layman's terms, the report is an assurance on whether the financial information presented by the auditee is materially correct and trustworthy for making various decisions, such as an investor's decision to buy or sell the company's stock, a bank's decision to lend money to the company, or the government's decision on whether the income reported in the financial statements reconciles with the amount reported for tax purposes (save for certain exceptions). Most countries only allow independent certified public accountants to issue auditor's reports on financial statements.

It is important to note that auditor reports on financial statements are neither evaluations nor opinions as to the financial health, performance, attractiveness, potential, or any other similar determination used to evaluate entities in order to make a decision. The report is only an opinion on whether the information presented is correct and free of material misstatements, whereas all other determinations are left for the user to decide.

There are four different types of auditor reports issued for financial statements, but they still share several components which are considered standard and mandatory in accordance with Generally Accepted Auditing Standards (GAAS). All four reports typically consist of a title and header, several main paragraphs describing the audit, the auditor's signature and address, and the report's issuance date. The header contains the letterhead "AUDITOR'S REPORT" or "INDEPENDENT AUDITOR'S REPORT", and is directed towards the auditee as a formal letter, and not to the third-party users of the report. The main body and paragraphs vary depending on the type of report issued, but all are followed by the auditor's signature and address, and by the report's issuance date. The reports are then attached by the auditee immediately in front of the company's financial statements.

There are four common types of auditor's reports, each one presenting a different situation encountered during the auditor's work. The four reports are as follows:

1) Unqualified Opinion report

The most frequent type of report is referred to as the Unqualified Opinion, and is regarded by many as the equivalent of a "clean bill of health" to a patient,[2] which has led many to call it the Clean Opinion. This type of report is issued by an auditor when the financial statements presented are free of material misstatements and are in accordance with GAAP, which in other words means that the company's ...