PPA- Unit 5 ncb

Module 5 Audit Report & Professional Ethics

Audit report
According to J. Lancaster, “A report is a statement of collected and considered facts
so drawn up as to give clear and concise information to persons who are not already
in possession of the full facts of the subject matter of the report.”

A report is nothing but a statement of facts. After findings the auditor has to present
his report. It is his duty to inform the client as to what he has done with its result.

The purpose of an audit report is to make a statement about a company’s financial

status related to its financial reporting. Annual audits demonstrate transparency in
corporate financial reporting, a positive step in establishing good relationships
between companies, their investors, and the public.

Advantages of an Audit Report:

 It shows you the accurate financial position of your company.

 The audit reports help in proving management integrity to their shareholders –
whether the company is honest & reliable towards their shareholders or not.
 Many parent companies having subsidiaries in the same or other countries want
their subsidiary’s financial statements to get audited. Hence, it helps in managing
the subsidiary more effectively.
 The auditor report helps in identifying the financial & non-financial problems of a
company, which may save the company from facing bankruptcy issues in the
future.
 An essential legal requirement to get your accounts audited to provide
information about annual turnover, the value of assets, number of employees, etc.
to the government and auditor is like evidence that can prove to the government
that the particular entity is working correctly and by the law.
 It is the requirement of shareholders. They want their company’s financial
statements audited. Then, the same report is examined by the experts and
expressed in such a way that it can be understood by most of the shareholders
who do not have strong finance or audit background.
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Elements of Audit Report:

For any enterprise, the audit report is a key deliverable which shows the end results
of the entire audit process. The users of financial statements like Investors, Lenders,
Customers, and others base their decisions and plans on audit reports of any
enterprise. An audit report is always critical to influencing the perceived value of
any financial statement’s audit.

The auditor should be careful in issuing the audit report as there is are a large
number of people placing reliance on such report and taking decisions accordingly.
The report should be issued by being unbiased and objective in discharging the
functions.

Elements of an audit report

Section/Heading Description
Title Independent Auditor’s Report. The title of the audit report
should be simple and include the word “independent”. This
indicates that the audit was performed by an external,
independent, and unbiased third party.
Addressee The report will clearly state to whom it is addressed.
Example: To The Shareholders Of Company Name or The
Directors
Introduction This would be a statement that states the name of the
company that is being audited, the dates of the financial
period that the audit covers, which is usually the fiscal
year.
Responsibilities of This section clearly states the responsibilities of the
directors and directors of the company being audited, and the
auditors responsibilities of the auditor. It states that the
management and directors of the company accept the duty
of providing the auditor with all the financial
documentation required for the audit. It also states that
the documentation provided is true and accurate to the
best of the director’s knowledge. It is stated that the
auditor’s role is to audit the financial statements given by
the company. It also states that the auditor must form his
opinion based on the information provided.
Opinion This section clearly states the auditor’s opinion.
Basis of opinion The section states that the audit was conducted in
compliance with the standards and describes the audit
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process and resources. This section may be longer than the

rest.
Other reporting If there are any other reporting responsibilities such as
responsibility legal or regulatory requirements they are mentioned here.
Signature of the Signed by the auditor
auditor
Date And place The date and city where the report was signed by the
auditor.

The audit report provides a picture of a company’s financial performance in a given

fiscal year and how effectively the company complies with regulations like the
Generally Accepted Accounting Principles

Types of Audit Report

Audit report can be categorised on the following two basis:

I. On the Basis of Scope

(1) Final Report: The report which is submitted by the auditor after completing the
whole work is known as final report. This is an important report, hence utmost care
must be taken while drafting the report.

(2) Interim Report: The report which is to be submitted by the auditor in the middle
of year for some special matters is known as Interim Report. Generally this type of
report is submitted to declare interim dividend.

(3) Partial Report: When the auditor is appointed not to examine all the books of
accounts, but is appointed to examine some books of accounts, the report so
submitted is termed as partial report. In such report, the auditor should make clear
that his appointment was made for partial examination and this is a partial report.

II. On the Basis of Nature:

(i) Clean or Unqualified Report: When the auditor is satisfied as to the

fairness of the balance sheet and profit and loss account, he will give a
clean report. In other words, if the auditor makes the various statutory
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affirmations without reservations, he is said to have given an unqualified

report on the financial statements of the company.
(ii) Qualified Report: Whenever the auditor of a company is not satisfied with
any explanation and information given to him or if he thinks that the Profit
and Loss Account and the Balance Sheet do not exhibit a true and fair view
of the state of the company’s affairs or if the accounts presented by the
directors call for further elucidation, he must ask the directors to set the
matters a sight and if he is unsuccessful in persuading the directors to do
so, he must mention that fact in his Report. Such a report is called
“Qualified Report” as distinct from a “Clean Report.

Will be headed up ‘Disclaimer of opinion’.

Example: there are a significant number of overseas subsidiaries that make up the
majority of a group’s operations and as the auditor is unable to obtain evidence to
audit the results of those overseas subsidiaries, an opinion on whether the financial
statements give a true and fair view cannot be given by the auditor.
Adverse opinion – the auditor judges, having obtained sufficient evidence, that there
is a material and pervasive misstatement in the financial statements and that,
because of the significance of the matter, the financial statements do not give a true
and fair view. The opinion section will be headed up ‘Adverse opinion’.
Example: revenue on long-term contracts has been significantly overstated as it has
not been recognised in accordance with applicable accounting standards. This
misstatement is considered by the auditor to be material and pervasive and because
of the significance of this matter, the auditor has determined that the financial
statements do not give a true and fair view.

Independent Auditor’s report

Meaning: An independent Auditor’s Report is an official opinion issued by an
external or internal auditor as to the quality and accuracy of the financial statements
prepared by a company. The report is a primary source of communication between
the auditor and users of financial statements. The users include equity holders,
lenders, creditors, and any other potential investors in the company.
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Types of Independent Auditor Report

1. Unmodified Report: The unmodified report is also called a complete report or

clean report. This report is issued by auditors when they are satisfied with
the financial statement that it presents the true and fair value of the business
operation. It gives investors and shareholders confidence to decide.

2. Modified Report: It is issued when an independent auditor is not satisfied with the
financial statement or cannot obtain sufficient and appropriate evidence to believe
that the financial information is free from any misstatement.

There are three types of modified reports that the auditor gives:

 Qualified Report – Qualified audit report is given when there is a reason to believe
that misstatement is provided in the financial statement or the auditor cannot
obtain appropriate and sufficient evidence. However, some misstatements in
financial statements may not be so high that they will become unacceptable.
 Adverse Report – The auditor reports negative reports by examining financial
statements and evidence obtained. They believe a material misstatement in the
financial information can affect stakeholders’ decisions.
 Disclaimer Report – When the auditors cannot form an opinion on financial
statements in the absence of sufficient and appropriate audit evidence, they cannot
perform an audit and give a disclaimer report.

Illustration:
Sample format of audit report
Given below is an example of a clean audit report.

Independent Auditors' Report

To the Board of Directors and The Shareholders,

Company ABC,

Address.

Report On The Financial Statements

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We XYX have audited the accompanying balance sheets of ABC Company as of

December 31, 20X2, 20X1 and 20X0, and the related statements of income,
earnings, and cash flows for the years then ended, and the related notes to the
financial statements.

Management's Responsibility for the Financial Statements

Management is responsible for …

Auditor's Responsibility

Our responsibility is to express an opinion on these financial statements based

on our audits. We conducted our audits in accordance with ...

Opinion

In our opinion, the financial statements referred to previously present justly, in

all material respects, the true financial position of ABC Company as of December
31, 20X2, 20X1 and 20X0, and the results of its operations and its cash flows for
the years then ended in conformity with the accounting principles that are
generally accepted in India.

(Signature)

(Date)
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Professional ethics
Professional ethics refers to the professionally accepted standards of personal and
business behavior, values, and guiding principles. It encompasses the personal,
organizational, and corporate standards of behavior expected of professionals.
Professionals and those working in acknowledged professions exercise specialist
knowledge and skill.

Objectives of Professional Ethics

 Professional accountants play an important role in building up the economic
wellbeing of their community and country with their attitude, behavior, and
unique services.
 They have common objectives, whether they work in the capacities of external
auditors, internal auditors, financial experts, tax experts, and management
accountants.
 Their common objectives are to perform their duties and responsibilities and
attain the highest levels of performance by the ethical requirements to meet
the public interest and maintain the accounting profession’s reputation.
 Personal self-interest must not prevail over these duties. The IFAC and ICAEW
Codes of Ethics help accountants meet these obligations by setting out ethical
guidance to be followed.
 To achieve these objectives, they must establish creditability, professionalism,
quality of service, and confidence.
 Acting in the public interest involves having regard for the legitimate interests
of clients, government, financial institutions, employees, investors, the
business and financial community, and others who rely upon the objectivity
and integrity of the accounting profession to support the dignity and orderly
functioning of commerce.
 In summary, accountants need to have an ethical code because people rely on
them and their expertise. It is important to note that this reliance extends
beyond clients to the general community.
 Accountants deal with a range of issues on behalf of clients. They often have
access to confidential and sensitive information.
 Auditors claim to give an independent view. It is, therefore, critical that
accountants are independent.
 Compliance with a shared set of ethical guidelines also protects accountants,
as they cannot be accused of behaving differently from other accountants.
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The need of professional accountants to ethics:

The question is raised why ethics is of great importance in accounting and audit?
There are some reasons as followings:
1. Professional accountants are responsible to public benefits and credit of
accounting profession and personal benefits shouldn’t be better than best public
benefits.
2. Accountants for the behalf of their employers are faced with some issues and they
have access to confidential information
3. and auditors claim the present independent opinion.
4. Professional accountant considers himself responsible to the employer. His
mission is solving the employer problem and creating required value for him. If such
value is not created and such problem is not solved, the professional accountant
hasn’t done his duty well. An accountant only after achieving required result of
employer does his duty well by doing all the measurements achieving the result.
5. Technically, professional accountants should do professional services in
accordance to appropriate technical standards. Professional accountants are obliged
to do the requirements of the employers as consistent with the requirements of
integrity, impartiality and if the professional accountants are formal accountants
with autonomy feature should be consistent.
6. To be familiar with the consistency with ethical principles, the professional
accountant should follow the technical and professional standards stated from the
following references: 1- International Federation of Accountants (IFAC) regarding
International Standards of Auditing (ISA) 2- International Accounting Standards
Committee(IASC)

The five fundamental principles

 Integrity: A professional accountant should be straightforward and honest in
all professional and business relationships. In Some circumstances, the
auditor could be put in a position where they are exposed to circumstances
that could impair their objectivity. In every circumstance, the auditor needs to
ensure that the auditor’s objectivity is not compromised by putting measures
that safeguard the auditor’s independence.
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 Objectivity: A professional accountant should not allow bias, conflict of

interest or undue influence of others to override professional or business
judgments.
 Professional competence and due care: A professional accountant has a
continuing duty to maintain professional knowledge and skill at the level
required to ensure that a client or employer receives competent professional
services based on current developments in practice, legislation and
techniques. A professional accountant should act diligently and in accordance
with applicable technical and professional standards.
 Confidentiality: A professional accountant should respect the confidentiality
of information acquired as a result of professional and business relationships
and should not disclose any such information to third parties without proper
and specific authority unless there is a legal or professional right or duty to
disclose. Confidential information acquired as a result of professional and
business relationships should not be used for the personal advantage of the
professional accountant or third parties.
 Professional behaviour: A professional accountant should comply with
relevant laws and regulations and should avoid any action that discredits the
profession.

Code of ethics
Code of ethics refers to a set of guiding principles for professional conduct and
behaviour. Code of ethics could be a document detailing an organisation's or
institute’s objective, values and mission statement.
Professional ethics include principles and standards documented for use by
professionals under the respective governing bodies such as the Institute of
Chartered Accountants of India.

1. Enhances the right organizational culture: Essentially, the purpose of a

professional code of conduct is to create organizational culture where
managers and employees trust one another. Ethical codes often foster
integrity, trust, and respect. They also provide a guide on people’s behavior.
2. Establishes a good image for the organization: Customers and shareholders
choose organizations with good reputation. In a competitive business
environment and a saturated marketplace, customers can choose the
companies that they trust. Those that don’t uphold ethical practices can go
drying on the hanger.
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3. Enhances compliance with the law: It is safe to say that everything that is
lawful is ethical, but not everything that is ethical is lawful. By developing an
ethical code of conduct, a company ensures that its employees are drawn
closer to the law, and are put on the right side of the law. Following a code of
ethics helps auditors comply with legal requirements and regulations,
reducing the risk of legal issue.
4. Professionalism: It establishes a standard of professionalism, guiding auditors
to conduct themselves ethically and maintain a high level of competence.
5. Public Confidence: Adherence to a code of ethics enhances public confidence
in the auditing profession, as stakeholders trust that audits are conducted
impartially and accurately.

Professional Accountant:

Professional accountants play a vital role in both public practice and business,
contributing to the financial health, compliance, and strategic decision-making of
organizations. Whether working in public accounting firms or within businesses,
accountants uphold high ethical standards, provide financial expertise, and help
ensure the transparency and accuracy of financial information. Professional
accountants, whether in public practice or business, play integral roles in shaping
the financial landscape of organizations. They contribute to financial transparency,
regulatory compliance, and strategic decision-making. The challenges they face
underscore the dynamic nature of the profession, requiring adaptability, continuous
learning, and a commitment to ethical conduct. Whether serving external clients or
contributing to internal organizational success, professional accountants are
essential contributors to the financial well-being of businesses and the overall
economy.

Professional Accountants in Public Practice:

Roles and Responsibilities:

• Audit and Assurance Services: Public practice accountants often engage in

providing audit and assurance services. They examine financial statements, assess
internal controls, and offer an independent opinion on the fairness of financial
reporting.

• Taxation Services: Accountants in public practice assist clients in navigating

complex tax regulations. They provide tax planning advice, prepare tax returns, and
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help businesses optimize their tax positions while ensuring compliance with tax
laws.

• Consulting and Advisory: Public practice accountants offer consulting services,

providing strategic advice on financial management, risk assessment, and business
processes. They may assist clients in mergers and acquisitions, forensic accounting,
and internal control evaluations.

• Compliance and Regulatory Reporting: Ensuring compliance with financial

regulations and reporting requirements is a key responsibility. Accountants in
public practice help clients adhere to accounting standards, regulatory frameworks,
and industry-specific regulations.

Client Relationship Management: Building and maintaining strong client

relationships is crucial. Public practice accountants often act as trusted advisors,
understanding client needs, and tailoring services to support the client's financial
goals.

Challenges:

• Independence and Objectivity: Maintaining independence and objectivity,

especially in the face of client pressures, is a constant challenge for public practice
accountants. Upholding ethical standards is critical to ensuring the integrity of audit
and assurance services

• Keeping Pace with Regulatory Changes: The dynamic nature of financial

regulations requires public practice accountants to stay informed about changes in
accounting standards, tax laws, and other regulatory frameworks to provide
accurate and up-to-date advice.

• Managing Workload and Deadlines: Public practice accountants often face tight
deadlines, especially during peak seasons such as tax filing periods. Managing
workloads efficiently while maintaining quality is a significant Challenge

• Technology Integration: Embracing and effectively integrating technological

advancements, such as data analytics and artificial intelligence, is crucial for public
practice accountants to enhance audit efficiency and provide valuable insights to
clients.
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Professional Accountants in Business:

Roles and Responsibilities:

1. Financial Reporting and Analysis: Accountants in business are responsible for

preparing and analyzing financial statements. They provide insights into the
financial health of the organization, supporting management in making informed
decisions.

2. Budgeting and Forecasting: Accountants play a key role in budgeting and

forecasting activities. They collaborate with various departments to develop and
monitor performance against targets. and provide various departments to develop
budgets, monitor performance against targets, and provide variance analysis.

3. Internal Controls and Risk Management: Ensuring effective internal controls and
managing financial risks are crucial responsibilities. Accountants in business
establish and monitor internal control systems to safeguard assets and mitigate
risks.

4. Management Accounting: Management accountants provide cost accounting

information and support strategic decision-making. They assist in evaluating the
financial impact of business initiatives and identifying opportunities for cost
savings.

5. Treasury and Cash Management: Accountants manage the organization's liquidity,

optimizing cash flow and overseeing treasury functions. They may be involved in
investment decisions, debt management, and ensuring adequate working capital.

Challenges:

1. Balancing Cost and Value: Accountants in business often face the challenge of
balancing the cost of financial reporting and compliance with the value they provide
to the organization. Demonstrating the strategic importance of finance functions is
crucial.

2. Adapting to Change: Businesses operate in dynamic environments, and

accountants need to adapt to changes in technology, regulations, and market
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conditions. Being flexible and proactive in responding to change is a continual

challenge.

3. Data Security and Privacy: With the increasing reliance on technology,

accountants in business must address concerns related to data security and privacy.
Safeguarding financial information and complying with data protection regulations
are paramount.

4. Strategic Decision Support: Providing meaningful insights to support strategic

decisions requires accountants to go beyond traditional financial reporting.
Developing analytical skills and effectively communicating financial information to
non-financial stakeholders can be challenging.

Common Ground:

While professional accountants in public practice and business have distinct roles
and face unique challenges, there are common principles that underpin the
profession:

1. Ethical Conduct: Both public practice and business accountants adhere to ethical
standards, ensuring integrity, objectivity, and confidentiality in their professional
activities.

2. Professional Development: Continuous learning and professional development

are essential for accountants in both sectors. Staying informed about changes in
regulations, accounting standards, and emerging trends is crucial for career
advancement.

3. Communication Skills: Effective communication is vital for accountants in both

settings. Whether explaining complex financial information to clients or
collaborating with internal teams, strong communication skills are essential.

4. Technological Proficiency: Embracing technological advancements is a shared

challenge. Both public practice and business accountants need to stay current with
technology trends to enhance efficiency and provide valuable insights.