Auditor’s report is a formal suggestion issued by an independent auditor or an internal auditor as a result of the audit process which is intended to be submitted to the users. The users include all the stockholders such as; the government, lenders and debenture holders, potential investors, the shareholders, the general public, insurers, customers, suppliers, stockbrokers, credit rating agencies, among others. The auditor report is considered a necessary tool when financial information is being reported to its users especially in business (Archer, et al., 1989). The directors who are responsible for the operation of the enterprise may prepare the financial statements in their favor at the expense of the users. The stockholders, therefore, require the report given by the directors to be certified by auditors and submit the opinion on the truth and fairness of the information. The auditors must prove that the statements prepared in all material aspects are in compliance with the financial reporting framework and statutory requirements and regulations.
The auditor’s report plays an important role to the shareholders as they help them to understand how their investment is going on. It provides a starting point for those who prefer buying shares for the first time. Through the reports, the shareholders will be able to determine if the company is making profits or losses and finally make a decision whether to continue investing in the business or not. The auditing reports also protect the rights of the shareholders and keep them informed that they are not exploited by the managers and the directors of the company. The shareholders will understand the reasons why there are changes in the profits as they are always given in the report. The information contained in the auditor’s report is also essential to the lenders and the debentures when determining if they can grant loans to the entity. The profits margins of the business will help the lenders to calculate the interest rate payable to them by the enterprise. The reputation of the business is evidenced in their reports as audited statements increase the credibility of the enterprise hence it can help the lenders such as financial institutions to rate the credibility of the company. Therefore the lenders can rely on the audited report when granting loans or credit facilities.
The information contained in the audit report is also useful to the government in various aspects. The tax authority which is a government body uses the reports of the auditors when assessing taxes to be paid by the enterprise. According to the statute, every entity has a liability to pay taxes to the government. The amount of tax payable varies from entity since this is determined by their reports which are different from one business to another. It’s also essential to the government when making economic policy decisions especially the ministry of finance (Schaefer & Peluchette, 2010). The nonperforming enterprises evident in the reports of the auditors can be taken over by the government so as to increase their levels of operation. The government will be able to know the value of their assets which makes it possible to dispose of them. As much as the auditor’s report is useful to the government, it is also important to the potential investors. Investors are always interested in investments that accrue high returns. For example, if buying shares of a certain company is more profitable, then it will call for more investors. The returns and the financial position of a company can only be in the reports submitted by the auditors. Investors will use the opinion expressed by the auditors in their report to rate whether it will be more profitable to make an investment decision.
Customers also rely on the auditor’s opinion to consider if they will continue to depend on the entity for the supply of goods and services. The financial statements give an expression of the financial position of the business which the customers deem necessary for proper decisions. Suppliers before making an agreement with the business to make their supply, require the information of auditors report so as to be aware of the stability of the enterprise. The reports are necessary for the supplier to make the decision on the regularity of supply and whether they will continue supplying their services to the company. The insurers also use the information when they are settling their claims and can easily calculate the actual loss of the property destroyed.
Going concerned is an important principle when preparing financial statements as it provides the underlying concept of periodic financial statements. The principle assumes that the enterprise will continue to operate or exist for the foreseeable future (ECIIA, 1996). To provide information ongoing concerns, I will seek a face-to-face audience with my client and explain the perceived ‘going concern’. I will have to discuss with my client the risks that can cause the enterprise’s going concerned to be uncertain (Ramos, 2009). I will discuss the appropriate audit procedures that will be included in the audit program. The discussion will analyze processes like vouching, accounts review, and audit tests to empower the client on proper auditing procedures. I will also highlight going concern problems like lack of disclosure of necessary information deemed to be useful in expressing suggestions. I will discuss the evaluation of management assessment of the entity’s ability to continue as a going concern with my client. This is expected to bring to light the working procedures of the management more so if in line with the required set procedures. I will enquire from my client the period to which the auditing report paid attention to –that is- whether it was yearly, quarterly etc. It is always expected that the directors and auditors consider a period of one year from the date of approval of the financial statements. The discussion will also include the procedures adopted by the management when identifying going concern problems. The discussion will be based on whether applying the going concern principle will be appropriate in the valuation and measurement of items appearing in the financial statements. The reasonable grounds for accepting the applicability of the going concern assumption will be reviewed in the talk. The talk will also be centered on the evidence necessary to convince the users that the company is likely to exist for the next period of not less than twelve months. If we do not agree on the going concern, then I will advice the client to ensure that the accounts are prepared on a market value or break up basis. If the client still refuses, then the auditors will have to qualify the accounts as a whole to the effect that they are not true and fair.
The following will be expected from the directors when making qualified audit opinion: plans for resolving matters giving rise to going concern doubts; obligation to other entities such as guarantors; budgetary system; and finally formal and informal systems for identifying risks.
There are a variety of stockholders who are interested in the auditors report. Every stockholder requires the information in making proper decisions concerning the company. The discussion of going concern with a client facilitates informed decisions that are likely to benefit the company.
References
Archer, S., McLeay, S. & Dufour, J. B. (1989). Audit Reports on the Financial Statements of European Multinational Companies: a Comparative Study. London: The Institute of Chartered Accountants in England and Wales.
European Confederation of Institutes of Internal Auditing (ECIIA). (1996). Position Paper on Internal Auditing in Europe.
Ramos, M. (2009). Risk-based audit best practices. Journal of Accountancy, 208 (6), 32-37.
Schaefer, J., & Peluchette, J. (2010). Internal control: Test your knowledge. Journal of Accountancy 209 (3), 46-49.