Auditing of organizational processes is carried out to check the efficiency of

the system, the practices that are being followed and to investigate the
company records, operations and functioning of the individual departments.
Auditing is done to ensure that the objectives or goals of the company are
being met and that the major functions like finance, manufacturing, quality,
project management etc. are running as per the standards set. If you are a
financial auditor, a quality management professional or running an auditing
firm, you will be aware of the different certification standards and industry
compliance laws that are required to conduct various kinds of audits. Our
discussion highlights the importance of auditing and explains how to write
an audit report by means of a sample audit report. You can learn more
about financial accounting and creating audit reports with this
introductory course.

What is Auditing?
Auditing is simply the process of evaluating a company’s internal functions
for their effectiveness and compliance, in an independent manner. It helps a
business in understanding the areas of improvement and analyze what’s
working for them and what’s not. Auditing could be internal or external in
nature; when the auditors belong to the organization’s internal body say for
example, an audit committee of the board of directors, then the auditing is an
internal one. Whereas, when an external agency or a government body is
involved in the auditing, then it’s known as external auditing. Whether it’s an
internal or external audit, the auditors must be allowed to conduct
assessments independently and given complete freedom to check the
processes according to the given rules and regulations. Check out this
course on SAP auditing, which will give you more insights on the
audit process and objectives.

What is an Audit Report

An audit report basically summarizes the findings of the audit conducted,
points out the issues and suggests remedial actions, and also reflects the
action plan suggested by the management of the company. Audit reports are
generally structured around the following five important elements:

1. Condition: describes the problem in the process, found during the

audit
2. Criteria: indicates the criteria that was not met (e.g. a quality
standard, a company policy document, accounting policies etc.)
 3. Cause: reason for the problem in the process
4. Consequence: what can the problem lead to? (negative outcome/
risk)
5. Corrective Action: what can the management do to correct the
problem? (And by when?)

Remember, the purpose of an audit is not a deliberate fault-finding but an

efficient way to set right the company processes if they are not being followed
correctly. Audit reports must be taken seriously by companies as they present
them with opportunities for improvement. They are essential tools that help
a business in achieving its objectives and move towards continual growth.

Elements of Audit Report

The basic elements of an auditor’s standard report on a company’s financial
audit are:

 A title that includes the word ‘independent’

 A statement that the financial statements identified in the report were
audited
 A statement that the financial statements are the responsibility of the
company’s management and that the auditor’s responsibility is to
express an opinion on the financial statements based on his or her
audit
 A statement that the audit was conducted in accordance with the
generally accepted auditing standards and an identification of the
United States of America as the country of origin of those
standards. Find out more on audit compliance with this
course.
 A statement that those standards require that the auditor plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement
 A statement that an audit includes

– Examining, on a test basis, evidence supporting the amounts and

disclosures in the financial statements

– Assessing the accounting principles used and significant estimates made by

management

– Evaluating the overall financial statement presentation

  A statement that the auditor believes that his or her audit provides a
reasonable basis of his or her opinion
 An opinion as to whether the financial statements present fairly, in all
material aspects, the financial position of the company as of the
balance sheet date and the results of its operations and its cash flows
for the period then ended in conformity with generally accepted
accounting principles. Learn more about financial statements
with this course on basic accounting.
 The manual or printed signature of the auditor’s firm
 The date of the audit report

If you’d like to learn more about understanding financial

statements, you can take this introduction to financial accounting.

Audit Report Sample

Having understood the basic elements of an audit report, let us now
understand the details more with the help of a sample financial audit report
as described below:

Example: Financial audit report of XYZ Company

Report on XYZ Company’s Financial Statements

Independent Auditor’s Report

[Appropriate Addressee]

Report on the Financial Statements

We have audited the financial statements of XYZ, comprising of the balance

sheet as on 31 December 2013, cash-flow statement and income statement
for the year 2012-13. We have also referred the accounting policies and other
documents of the Company Record ABC.

Management’s responsibility for the financial statements

The directors of the company are responsible for the preparation of the
financial statements so as to give a true and fair view in accordance with the
accounting principles generally accepted in the United States of America. The
directors are also responsible for the internal control as defined by the
management to enable preparation of the financial statements that are free
from any misstatements, whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express our opinion on the financial statements of

your company based on our audit. We have conducted the audit in an
independent and fair manner in accordance with the auditing standards of
the United States of America and the standards applicable to financial audits.
Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatements.

We have followed the procedures mentioned in our detailed audit plan to

collect evidence about the disclosures made in the financial statements and
have made the necessary risk assessments based on our judgement and
experience. We believe that the evidence so collected during our audit is
sufficient to formulate our audit opinion.

Opinions

In our opinion, the financial statements referred to above present fairly, in

all material respects, the respective financial position of the Company XYZ as
of 31 December 2013 and its performance and cash flows indicated are in
accordance with the accounting principles generally accepted in the United
States of America.

Report on Other Legal and Regulatory Requirements

In accordance with the auditing standards of the United States of America,

we have also issued our report dated [date of report] on our consideration of
Company XYZ’s internal control over financial reporting and our tests of its
compliance with certain provisions of laws, regulations, contracts, and grant
agreements and other matters. The purpose of that report is to describe the
scope of our testing of internal control over financial reporting and
compliance and the results of that testing, and not to provide an opinion on
internal control over financial reporting or on compliance. That report is an
integral part of an audit performed in accordance the auditing standards of
the United States of America in considering XYZ’s internal control over
financial reporting and compliance.

Other Matters
This report is made solely to the members of the Company XYZ, as a body, in
accordance with the auditing standards of the United States of America and
for no other purpose. We do not assume responsibility to any other person
for the content of this report.

[Auditor’s Signature]

[Auditor’s City and State]

[Date of the Auditor’s Report]

Note: The auditor’s report is based on the company’s financial statements-

balance sheet, statement of income, statement of retained earnings and
statement of cash flows. Each financial statement that is audited must be
specifically identified in the introductory paragraph of the auditor’s report.

This is a sample report on the financial audit of a business entity. There are
other financial audit report formats for government institutions, not-for-
profit organizations etc., which are similar in nature but with slight
differences based on the auditing or accounting standards.

In case of an audit on the quality management of an organization or an

operational audit, the auditor would give a list of non-conformance, if any,
and suggest corrective actions for each of them. Thereafter, the management
would indicate its commitment on resolving the issues by accepting the
recommendations and mentioning the action plan along with the completion
date.

To conclude, audit reports vary based on the kind of audit, the processes
involved and objectives of the audit itself. If you are the owner of an audit
firm or run a business, it’s essential for you to understand the importance of
a good auditing system, the best practices in the industry and the motivation
to achieve overall business excellence.
 How to Write an Audit Report
An audit report is the formal opinion of audit findings. The audit report is the end result of an
audit and can be used by the recipient person or organization as a tool for financial reporting,
investing, altering operations, enforcing accountability, or making decisions. An effective audit
report is essential to making sure the results of your audit are presented in a way that is useful
to the party receiving the audit.

1
Learn the different types of audit. An audit is considered an official examination to
verify that proper policies and procedures were followed, and therefore, an audit can
take many forms.[1]
 Financial Audit: This is the most commonly known form of audit and refers to the
systematic review of a company's financial reporting to ensure all information is valid
and conforms to GAAP standards.
 Operational Audit: An operational audit is a review of an organization's usage of
resources to ensure those resources are being utilized as efficiently and effectively as
possible to accomplish the mission and goals of the organization.
 Compliance Audit: A compliance audit is performed to determine if an organization or
program is operating in according with laws, policies, regulations, and procedures.
 Investigative Audit: These are typically commissioned when there is an assumed
violation of rules, regulations, or laws, and may involve a blend of all the previously
mentioned types of audit.

2
Understand the basic goals of all audit reports. Before delving into the specifics of
writing an audit report, it is important to have a broad view of the major objectives of all
audit reports. Having these in mind as you delve into the technicalities of writing a report
will make sure your report does what it is supposed to do.
 Illustrating non-conformities: The main goal of any audit report is to illustrate where the
organization does not conform with whatever standard, rule, regulation or objective that
it is supposed to. It is important to clearly identify the non-conformity, as well as the
standard it does not conform to. It is then important to demonstrate which evidence you
used to confirm the non-conformity. The goal is that each non-conformity will contain
enough information so that the receivers of the audit report can change it. [2]
 Outlining positives: An audit report should not just include negatives. This is especially
true for compliance reports, and operational audits. This allows the organization to focus
on areas that are working and apply these to other areas. For example, if you are
conducting a compliance audit to ensure an organization meets training requirements,
you may say, "The audit reveals the current training program has exceeded
requirements on-time and on-budget".
 Opportunities for improvement: Beyond indicating things that are not conforming to
requirements (non-conformities), it is important to also indicate high-risk areas, or areas
that may be in compliance but are at risk of eventually not complying, or could be
improved. [3]

3
Learn the types of audit opinions. If you are writing a financial audit report, for
example, it is important to understand there are four basic types of opinion that can be
expressed. Which opinion you express affects the tone, structure, and organization of
an audit report, and the type of opinion you express is determined by the results of the
audit. Other types of audits (like operational and legal audits) can use the same types of
opinions.
 A clean opinion is used if an entity's financial statements are a clear representation of
an entity's financial opinion.
 A qualified opinion is used when there were scope limitations on the auditor's work.
Scope limitations are restrictions on the audit caused by the client or other events that
do not allow the auditor to complete all aspects of his or her audit procedures.
 An adverse opinion is used if financial information was misstated.
 A disclaimer opinion can be triggered by several different situations. For example, the
auditor may not be independent or there are concerns with the auditee. [4]

 4
 Think about who will be reading the report. Who will be reading your
report, and what is their scope of knowledge on the language you will use?
An audit report is an official record of an audit project, so it will likely be
returned to in later years for re-audits. Define all the terms and
abbreviations you use, as the standard forms of communication have
potential to change.[5]