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fam Chapter 12 22092005

fam Chapter 12 22092005

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financial audit manual
financial audit manual

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Published by: Humayoun Ahmad Farooqi on May 17, 2010
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06/29/2011

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12.THE AUDIT REPORT
12.1Introduction
12.1.1DAGP produces three main types of report:a)Financial certification report expressing an audit opinion (on thegovernment as a whole, on an audit entity or on a major project); b)Individual reports on audit work focused on investigations, compliance or  performance (although often these may be included as part of thecertification report); andc)Annual Report.12.1.2The Auditor General’s Annual Report is a key document. Every audit teamhas to ensure that its input for the Annual Report is produced in a timelymanner; is clear and concise; and is free of any errors.12.1.3Much of the impact of the audits and the reputation of DAGP rests on thequality of the Annual Report and, to a lesser degree, the individual auditreports produced. Thus, the report is not only an integral part of the audit but the key to audit success.12.1.4In an attest audit, the major concern is the reliability and fairness of the presentation of the financial facts in the financial statements. Onlyinappropriate accounting methods, material risks and significantmisrepresentations are normally commented on. Audit observations of minor inaccuracies and errors should not be included in an audit report. Alarge volume of small inaccuracies or errors should be summarised as anerror percentage.12.1.5In compliance auditing, the report should focus much more on the controlsin place and the reliance that can be placed on them than on individualfindings. The audit report should not list all the minor non-compliance or errors observed.12.1.6In the case of performance audits, a much higher proportion of the auditwork gets included within the report. Further, in performance audit reports,much more explanation of the business of the entity and description of theareas examined is usually included than in the other types of audit. Theauditor’s expectation, or performance criteria, is often included to place theobservations and conclusions in context.12.1.7Whatever the audit type, the same considerations apply:a)Audit reports should be easy for entity management to read (brief, clear andin the case of performance audits, pertinent); b)The Annual Report will be read by Parliamentarians, the media and the public and so should be written with a minimal technical terminology andnot assume an understanding of the detailed business of the entity;c)The contents of the report should focus only on material and significantmatters;
Audit Manual – Chapter 12
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The impact of audits rests onthe quality of the AnnualReport and individual audit report. Audit reportsshould be easy for the entity management toread.The report should focus
 
d)Any assurances, conclusions and recommendations should be useful; ande)All statements should be fully supported by reliable and sufficient evidence.12.1.8Audit reports take a very different form according to whether they are presenting:a)An opinion on a set of financial statements; or  b)The results of reviewing compliance and performance.12.1.9These are discussed in the following sections.
12.2The Certification Report and Types of Opinion
12.2.1The Certification Report is the product of the financial attestation auditwork. It follows very specific standards, modified as necessary to reflectdifferent qualifications that the auditor may wish to express.
Unqualified auditor’s opinion on financial statements
12.2.2The auditor’s report on a set of financial statements is referred to as the“auditor’s opinion”, even though the report is often entitled “Auditor’sReport”. This differentiates the report from other audit reports, such asreports dealing with compliance with authority and performance matters.These other reports are discussed in a subsequent section.12.2.3Paragraph 4.0.9 of DAGP’s Auditing Standards states, “An audit opinion isnormally in a standard format, relating to the financial statements as awhole, thus avoiding the need to state at length what lies behind it butconveying by its nature a general understanding among readers as to itsmeaning. The nature of these words will be influenced by the legalframework for the audit, but the content of the opinion shall indicateunambiguously whether it is unqualified or qualified and, if the latter,whether it is qualified in certain respects or is adverse (paragraph 4.0.14) or a disclaimer (paragraph 4.0.15) of opinion.”12.2.4This Auditing Standard contains several important messages. First, theauditor expresses one opinion on all of the financial statements, as opposedto having a separate opinion on each financial statement. Second, and probably more important, it is critical that the readers receive anunambiguous message.12.2.5For the readers to receive an unambiguous message from what is normallya very short report, it is important that:a)The auditor adopt a standard wording for an unqualified opinion, and onlydeviate from that standard wording when a reservation of opinion is beingexpressed; and b)Any reservations of opinion be very clearly expressed.
Audit Manual – Chapter 12
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The CertificationReport followsvery specificstandards.
 
12.2.6When expressing a reservation of opinion the auditor should not issue anopinion that deviates only somewhat from the standard wording, as themessage could be ambiguous. There is a danger that casual readers willread it as an unqualified opinion. Even readers who are familiar with thestandard content of an audit opinion might not be able to determine whether or not the deviation is intended to be a reservation of opinion.
When to Give an Unqualified Opinion
12.2.7As discussed in Paragraph 4.0.10 of DAGP’s Auditing Standards, “anunqualified opinion is given when the auditor is satisfied in all materialrespects that:a)the financial statements have been prepared using acceptable accounting bases and policies which have been consistently applied; b)the statements comply with statutory requirements and relevant regulations;c)the view presented by the financial statements is consistent with theauditor's knowledge of the audited entity; andd)there is adequate disclosure of all material matters relevant to the financialstatements.”
Standard Wording
12.2.8An example of a standard unqualified auditor’s opinion is contained in theStandard Audit Working Paper Kit.12.2.9To fully comply with paragraph 4.0.8 of DAGP’s Auditing Standards, theunqualified opinion should contain:a)A title; b)An addressee;c)A signature and a date; andd)Three standard paragraphs – an introductory paragraph, a scope paragraphand an opinion paragraph - which contain material that satisfies the other disclosure requirements of paragraph 4.0.8 of DAGP’s Auditing Standards.Each of these paragraphs is discussed below.12.2.10
The introductory paragraph.
The introductory paragraph identifies thefinancial statements covered by the auditor's opinion and distinguishes theresponsibilities of management and the responsibilities of the auditor.12.2.11
The scope paragraph.
In this paragraph the auditor informs the reader thatthe audit was planned and performed in accordance with professionalstandards, and that the auditor has made judgments in applying thesestandards. It also provides the reader with some explanation of the natureand extent of an audit and the degree of assurance it provides.
Audit Manual – Chapter 12
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