PRINCIPLE AND PRACTICE OF AUDITING III B.

Com (NEP)
UNIT 5
AUDIT REPORT AND PROFESSIONAL ETHICS

AUDIT REPORT
Audit report is the final stage of audit process. The results of the audit are communicated through
audit report. Audit report is the written opinion of an auditor regarding companies financial
statements. Audit report is a document prepared by an auditor to certify the financial position
and accounting records of a firm.

MEANING OF AUDIT REPORT

Audit report is the statement included in the financial statements. It contains the opinion of the
auditor in financial statements. The auditor reports to the shareholders who have appointed him.
He has to provide his opinion on the truth and fairness of financial statements. Thus, the auditor
protects the interest of shareholders through audit report.

DEFINITION OF AUDIT REPORT

Lancaster has defined a report as “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 subject matter of the report.”

According to Cambridge Business English Dictionary, Audit report is defined as a formal

document that states an auditor’s judgment of a company’s accounts.

ELEMENTS OF AUDIT REPORT

1. Title of the report

The title of audit report should help the reader to identify the report. It should disclose the name
of the client. The title distinguishes the audit report from other reports.
2. Name of the Addressee
The addressee normally refers to the person who appoints the auditor. If a company appoints the
auditor, the addressee should be shareholders. As per law, the complete address of the addressee
is required. Addressee for the statutory audit shall be shareholders and in case of Special Audit, it
is Central Government.
3. Introductory Paragraph
The introductory paragraph should specify that it is the auditor’s opinion on financial statements
audited by him. The period covered by financial statements should be stated with exact dates.
4. Scope
This part should include the matter-of-fact relating to the manner in which audit examination
was made. The audit examination should cover company’s accounts, Profit and Loss Account,
Balance Sheet and Cash Flow Statements. The examination should be as per the relevant law. The
auditor should not curtail or limit any examination task.
5. Opinion
The auditor’s opinion on the books of account and financial statements examined by him is based
on the information and free from bias. The auditor has to give his opinion as follows:
• Whether the financial statements are arithmetically correct and correspond to the figures
recorded in the books of accounts.
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PRINCIPLE AND PRACTICE OF AUDITING III B.Com (NEP)

• In case of unqualified opinion, whether the financial statements represent a true and fair
view of the state of affairs and the results of operations.
• In case of qualified opinion, if the Balance Sheet and Profit and Loss account do not
present a true and fair view, the reasons for what and where is wrong.
6. Signature
The signature part should include the manual signature of the auditor. The personal name and
signature of the auditor should be given. If the auditor is a firm, the signature in the personal
name and firm name should be given.
7. Place of Signature
This should include the location of the auditor or the auditor firm, which is ordinarily their city.
8. Date of the Report
The date of completion of the audit work should be mentioned in this section.

TYPES OF AUDIT REPORT

The audit report may be of the following types:
1. Clean or Unqualified Report
Clean or Unqualified report will be given by the auditor if the auditor is satisfied that the
accounts, Balance Sheet, Profit and Loss Account and Cash Flow statement do represent a true
and fair view and they are prepared in conformity with the accounting principles and statutory
requirements.
2. Qualified Report
In qualified report the auditor believes that overall financial statements are not fairly stated. The
reasons for giving Qualified Report are be as follows:
i. The books of accounts, Profit and Loss Account and the Balance Sheet do not represent the true
and fair view of the state of affairs and results of the operations, due to lack of conformity with
the accounting principles and statutory requirements,
ii. The auditor is not able to verify the value and existence of certain assets,
iii. The information requested by the auditor is not furnished,
iv. Proper books of account are not maintained as required by law,
3. Part of audit examination done by other auditor.
4. Adverse or Negative Report
When there is sufficient basis for the auditor to form an opinion that the whole accounts and
financial statements, do not present a true and fair view of the financial condition and results of
operation, the adverse or negative opinion will be given. The adverse or negative report will be
given on the following grounds:
When the auditor is not satisfied with the truth and fairness of financial
statements, Non conformity with the Generally Accepted Accounting Principles,
Mistakes, discrepancies and material misstatement in the financial statements,
Omission of a material disclosure.
5. Disclaimer Report
The auditor may disclaim or refuse opinion on the accounts, Profit and Loss Account and the
Balance Sheet, when he does not have sufficient information to base his opinion. In the scope and
opinion paragraph, the auditor should give disclaimer information. This may happen on the
following grounds:
· The auditor has not been able to obtain sufficient information to form his opinion,
· The audit examination is not adequate to form an opinion,

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PRINCIPLE AND PRACTICE OF AUDITING III B.Com (NEP)
· There are some material un-determined item in audit examination.

DIFFERENCES BETWEEN UNQUALIFIED, QUALIFIED DIFFERENCES BETWEEN

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.

PROFESSIONAL ETHICS
Professional ethics refers to the professionally accepted standards of personal and business
behaviour, values, and guiding principles. It encompasses the personal, organizational, and
corporate standards of behaviour expected of professionals.
Professionals and those working in acknowledged professions exercise specialist knowledge and
skill.
Professionals can make judgments, apply their skills, and reach informed decisions in situations
that the general public cannot because they have not received the relevant training.
ETHICS FOR PROFESSIONAL AUDITOR
1. Integrity
A professional accountant should be straightforward and honest in all professional and business
relationships.
2. Objectivity
A professional accountant should not allow bias, conflict of interest, or undue influence of others
to override professional or business judgments.
3. Professional Competence and Due Care
A professional accountant must maintain professional knowledge and skill at the level required
to ensure that a client or employer receives competent professional service based on current
developments in practice, legislation, and techniques.
Professional accountants should act diligently and by applicable technical and professional
standards when providing professional services.
4. Confidentiality
A professional accountant should respect the confidentiality of information acquired from
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 it.
Confidential information acquired from professional and business relationships should not be
used for the professional accountant’s or third parties’ advantage.
5. Professional Behaviour
A professional accountant should comply with relevant law and regulations and avoid any action
that discredits the profession.
CODE OF ETHICS FOR PROFESSIONAL AUDITOR
1. The Self-interest Threat
Self-interest threat occurs when a firm, network firm, or an assurance team member could
benefit from a financial interest in or other self-interest conflicts with an assurance client.
2. The Self-review Threat
Self-review threat occurs when any product or judgment of a previous assurance engagement or
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PRINCIPLE AND PRACTICE OF AUDITING III B.Com (NEP)
non- assurance engagement needs to be re-evaluated in reaching conclusions on the assurance
engagement; or a member of the assurance team was previously a director or officer of the
assurance client or was an employee in a position to exert direct and significant influence over
the subject matter of the assurance engagement.
3. The Advocacy Threat
Advocacy threat occurs when a firm, a member of the assurance team, or a member of the
network firm, as applicable, promotes or may be perceived to promote an assurance client’s
position or opinion to the point that objectivity may or may be perceived to be, compromised.
Such might be the case if a firm or an assurance team member were to subordinate their
judgment to that of the client.
4. The Familiarity or Trust Threat
Familiarity threat occurs when a close relationship with an assurance client, its directors, officers,
or employees, a firm, or a member of the assurance team or network firm, as applicable, becomes
too sympathetic to the client’s interests.
5. The Intimidation Threat
Intimidation threat occurs when a member of the assurance team may be deterred from acting
objectively and exercising professional scepticism by threats, whether actual or perceived, from
the directors, officers, or employees of an assurance client.
6. Safeguards
The auditor’s responsibility is to ensure that they remain independent of the client entity.When
no effective safeguards are available to reduce the threats to an acceptable level, the only possible
actions are to eliminate the activities or interest creating the threat or to refuse to accept or
continue the assurance engagement.
FUNDAMENTAL PRINCIPLES OF PROFESSIONAL ETHICS
1. Integrity
A professional accountant should be straightforward and honest in all professional and business
relationships.
2. Objectivity
A professional accountant should not allow bias, conflict of interest, or undue influence of others
to override professional or business judgments.
3. Professional Competence and Due Care
A professional accountant must maintain professional knowledge and skill at the level required
to ensure that a client or employer receives competent professional service based on current
developments in practice, legislation, and techniques.
Professional accountants should act diligently and by applicable technical and professional
standards when providing professional services.
4. Confidentiality
A professional accountant should respect the confidentiality of information acquired from
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 it.
5. Professional Behaviour
A professional accountant should comply with relevant laws and regulations and avoid any action
that discredits the profession.

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