What is an Audit Report?

The audit report serves as a formal written opinion prepared and conducted by independent or external auditors. Its main objective is to determine whether an organization presents its financial statements in accordance with an applicable financial reporting framework, such as the International Financial Reporting Standards (IFRS) or the Generally Accepted Accounting Principles (GAAP). 

An audit report serves as a tool to establish the trustworthiness of its content. It provides shareholders, regulators, lenders, and donors with confidence that the financial information they rely on has been assessed according to established auditing standards (e.g., International Standards on Auditing or ISA).

What are the 4 types of audit reports?

There are four distinct types of audit reports presented to stakeholders, depending on the auditor’s findings.

1. Unqualified (Clean) Audit Report: This represents the strongest possible result as it shows that financial statements contain no major errors and meet all required accounting standards. Many organizations work toward achieving an unqualified opinion as it represents their success in financial reporting and internal control systems.
2. Qualified Audit Report: This is issued when an auditor identifies a specific issue that is material but not pervasive to the financial statements. For instance, a limitation in audit scope or a departure from accounting standards affecting one account. The report will encompass a basis for qualification section that explains the issue.
3. Adverse Audit Report: The auditor issues an adverse opinion when financial statements contain both material and pervasive misstatements, making the entire financial statements untrustworthy. This occurs infrequently, yet it represents a serious threat as it demonstrates basic flaws in either accounting processes or financial reliability.
4. Disclaimer of Opinion: This occurs when an audit cannot find enough appropriate audit evidence to create or validate an opinion. This may result from issues that are too big to resolve, such as severe scope limitations or a lack of record access.

Who prepares an audit report?

An audit report is prepared by an independent external auditor or audit firm. These auditors must hold professional certifications such as Chartered Accountant or Certified Public Accountant and must follow ethical standards, including independence from the audited entity.

The management creates financial statements while auditors take charge of all auditing activities, which include planning, evidence assessment, and signing. Moreover, the audit report in regulated entities is delivered to shareholders and to those who oversee governance, such as the board and audit committee.

What are the 5 Cs of audit reporting?

The 5 Cs of audit reporting are a structured framework commonly used in audit findings and internal audit reports to ensure clarity, completeness, and actionability.

1. Criteria: Defines the benchmark or standard utilized to evaluate company performance. This may involve accounting standards, internal policies, laws, or regulatory requirements. Without clear criteria, audit findings will lack context.
2. Condition: Describes the issue determined during the audit process. This answers the question “What did the auditor observe?” and must also be factual and evidence-based.
3. Cause: Explains why the issue identified in the audit has occurred. This may include inadequate controls, insufficient training, system limitations, or governance weaknesses. Root causes must be determined for effective remediation.
4. Consequence (or Effect): Outlines the issue’s actual or potential impact, may it be operational inefficiency, financial misstatement, compliance risk, or reputational damage. Consequences can also be used to assess risk severity. 
5. Corrective Action (or Recommendation): Delivers clear, practical recommendations to address the issue and prevent recurrence. A strong audit report aligns recommendations with risk level and organizational capacity.