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An audit report is a report that review and evaluate by the auditor about a company to form an opinion whether the company used proper accounting recording method, the financial statement provide adequate disclosure (John A.) and show true and fair view, and compliance with the Law. The audit report can also be known as a communication channel between the auditor toward its stakeholder such as shareholders, public or investors, suppliers, bankers and more. There are a few type of audit report that will be prepare by the auditor which are standard audit report (unqualified audit report), adverse or negative audit report, qualified audit report and more. The purposes of auditor preparing these report are because of it is required by Law which is under Companies Act 1965 that require the external auditor to investigate the financial statement of the company that appointed them to form an opinion on the company financial statement to obtain reasonable assurance whether it is free from material misstatement and prepared accordance to the Act. The auditor will also provide an opinion that the account of the company show true and fair view. If the company financial statements meet all requirements above, then the auditor can provide a standard audit report for the company. These report will be useful for it stakeholder to know the performance, profitability, liquidity and also credit worthiness of a company.
The purposes of standard audit report.
There are a few purposes of standard audit report that I would like to discuss about. The standard audit report is really important to the stakeholders and likely to affect their decision making towards the company.
Channel of communication
The standard audit report is a channel of communication between the auditors to the stakeholders. The information that provided by the auditors inside the audit report may affect the trust and decision of stakeholders towards the company. And because of the audit report, a company reputation might be affected. An audit report is a must for the stakeholders or user of the financial statement because it is certified by an external auditor which is a non-related party to the organization, group or company and it will be more trust-worthies rather than just a financial statement that prepare by the company itself. So, what information inside the audit report that attract so much attention of the stakeholders?
The audit opinion of the auditors that shown true and fairness in the financial statements.
The accounting records is kept accordance to the Act
It is free from material misstatements
The financial statements is prepare according to the standard approved by the IFRS.
With the audit opinion above, the stakeholder may feel relieve and trust the financials statements that is prepare by the company. Standard or qualified audits report will help a company to obtain loan from the banks, improve the reputation and also help in attracts the potential investors.
Required by the Company Act, 1965 Malaysia
The second purpose of standard audit report that I am going to discuss about is the audit report is prepared under the requirement of Company Act, 1965 Malaysia. An auditor is required to prepare an audit report and provide 'true and fair view' is required under s 169 Company Act. Under the Act, the auditor is also required to form an opinion and provide independent assurance that the financial information from the company is reliable and state any failure or deficiency of the company financial statement. Furthermore, auditors is required by the act to report whether the account have been properly drawn up.
The other purpose that I am going to discuss about is the audit procedure in obtaining audit evidence in the standard audit report. The standard audit report will show that whether the auditor obtain enough audit evidence in auditing the company. Auditor need to collect audit evidence to show that the company financial statement did not have any material misstatement that is due to fraud and error. A few procedure need to be go through by the auditor in order to obtain the audit evidence. Risk assessment is one of it. Under International Standard of Auditing 315, the auditor is required to perform risk assessment to understand the entity and its environment such as the internal control to assess the risks of material misstatements. Test of control also need to be perform to obtain audit evidence. The suitability and effectiveness of internal control will be tested in order to detect any fraud and error that will lead to material misstatements. Other than that, substantive procedures that are perform by testing the transaction or account balance will help the auditor to locate material misstatements that is cause by fraud and error. After auditor collected enough audit evidence, then auditor will state inside the auditors' responsibility of the standard audit report that they have acquire enough audit evidence for their audit opinion to state that the company financial statements show true and fair view.
Lastly, the major purpose of standard audit report is to provide information about the company to the user. The company location, the business run by the company will let the user of the audit report to know more detail about the company. The profitability of the company that is present in the statement of comprehensive income will affect the decision of the user whether to invest in the company or not. Furthermore, performance and wealth of the company will also affect the decision of the user too. Investments of the company that shown in statement of financial position and further explanation in note to the financial statements is also the purpose of the stakeholder look into the standard audit report. The liquidity of the company that shows in the statements of cash flow of the standard audit report will also affect the decision of the stakeholder. Also, the user will also likely to look into the audit opinion of the auditor that state the condition whether the company financial statement show true and fair view. This information will lead to change of decision making of the stakeholders.
The usefulness of standard audit report towards it stakeholders.
The standard audit report is useful to it stakeholders. Stakeholders need the information from the standard audit report to make decision on the company they are going to have a business deal with. There are various types of stakeholder that have interest in using the standard audit report such as shareholders, investors, bankers, suppliers, government, employees and more. Standard audit report has different usefulness for each and every different stakeholder. So now I am going to discuss about the usefulness of standard audit report based on the perspective of stakeholders.
First of all, let's talk about the shareholders. How is the standard audit report being useful to the shareholders? The standard audit report provides information and this information is important for the shareholders in making decision. For an example, the profitability of the company is the most important and crucial information that the shareholder want to know about. The profit that shown under the statement of comprehensive income will be analyzed by the shareholders and they are very interested in what make the different between this year profit compare to the last year. Furthermore, the information that provided under statement of comprehensive income which is the dividend rate is also very useful for the shareholders to know the dividend that they are going to get this year. Next, the other usefulness of the standard audit report is that it can show to the shareholders the performance or growth of the company. A good performance of the company will provide the shareholders assurance to the company that it will lead to a bright future. Other than that, shareholders will also be interested in how is the capital of the company managed by the board of directors. Directors act as a steward of the company to safeguard and fully utilize the assets of the company to maximize the profit. Shareholders can get to see in the standard audit report whether the assets is managed well or no.
The second party that will find that the standard audit report is useful is the investors. Investors will likely to know about more details about the company and the standard audit report will show the basic information of the company like who is the director, the company location, which sectors the company into and more. Secondly, the investors are also very interested in the company performance and profitability. If a company is performing well and have a good profit, then the investor will be more likely to invest in the company because they would like to get a good return in form of dividend or capital earning. Is a company is performing according to the Act and did the financial statements contain any materials misstatements due to fraud and error is also what the investor want to know about. All the information inside the standard audit report that is mention above whether it is good or bad, the investor will find it useful in making decision whether to invest in the company or not.
There are two creditors that I would likely to discuss about which are the bankers and suppliers. These two parties will find that the information in the standard audit report is very useful to them. Let's start with the bankers. Bankers will like to know about the credit worthiness of the company before they are going to grant the company loan. The bankers will looking into the past or current loan record of the company to see whether the company is paying back the loan in a good manner. Bankers will also need to know about the information such as the profit, cash flow, assets and liability before grating a loan to the company. Those items I mention above will affect the decision making of a banker if the company did not show good figures that meet the bankers' expectation. Next, I am going to discuss about the suppliers. Suppliers who would like to provide service to the company will looks into the standard audit report first before making any judgment. The information in the standard audit report which is the liquidity that shows under the statements of cash flow will affect the suppliers' decision. Other than that, the profitability, trade payables, goodwill and other information will also be go through by the suppliers before making decision.
Other stakeholder and perspective
The information provided inside the standard audit report is also very useful to the government because the government want to monitor the company the activities whether it is abiding the Law or not. Secondly, government or the tax authorities will like to look through the profitability because they need to ensure that the company is paying correct amount of tax and in accordance to the Tax Law and regulations. (Inland Revenue Board)
Finally, I am going to discuss about the trust or assurance. This is the most important factor that made the standard audit report useful to every stakeholder. This is because the financial statements are prepared by the directors and the stakeholder could not just believe in the financial statements. The standard audit report that is produce by the independent auditor which is the third party that has no relation to the company will provide opinion on the company financial statements and will give assurance to the stakeholders that the company financial statements are trustable. And this is the part that makes the standard audit report useful.
As a conclusion, we can see that the information is very important to the stakeholder for the purpose of decision making. The information from the standard audit report is also a very useful tool for the stakeholders too.