What Is an Audit Report?
An audit report is the written opinion of a qualified auditor regarding your business’s financial statements. The report is presented in a standardized format and is mandatory according to the generally accepted auditing standards (GAAS). GAAS enables some variations in audit reports depending on the circumstances under which the audit is conducted.
An audit report of a company is simply an examination of your financial reports by someone independent of your organization. The accounting audit report includes an income sheet, a balance sheet, a cash flow statement, changes in equity statement and a notes summary.
The purpose of auditing reports is to evaluate whether the information about your organization matches your financial statements at a given date.
Why Do Businesses Get Audit Reports?
A business typically gets audited to ensure their entity is not avoiding FICA or federal taxes. Some companies get audited because they over-report expenses, hide or under-report income, misclassify employees, or redeem ineligible deductions. Some other reasons why your business may get audited include:
1. Your Reported Revenue Is Outside the Industry Norm
Revenue is a key focal point when evaluating your business’s financial statements and deciding whether to audit you. If your business diverges from the industry standard income, it is a red flag that may result in an audit.
2. You Are in the Process of Being Acquired
If a company acquires your business, they will do a deep dive into your financials to ensure you handled your taxes correctly.
3. You Have Previously Been Audited
After you have been audited once, auditors will check your business books to see if you have missed any taxation items. The process will continue until you organize your books. You can leverage an auditing service to help break the cycle.
4. You Are Sharing Articles of Unprecedented Growth
Press releases and articles about accelerated growth, acquisitions and additional investments can trigger audits. Auditors may investigate your financial statements to ensure you paid the necessary taxes.
5. You Made Inaccurate Statements Regarding Your Registration
Your business must register for a tax license timely, and you must acquire sales tax licenses before your revenue exceeds your state’s parameters. Claiming your business started after the date that it did can result in an audit.
Understanding Audit Reports
Reading through an auditor’s report may seem daunting, but you can take the stress out of the process by familiarizing yourself with how these reports are structured and the purpose of each section. Once you know how to read an audit report, you can accept the document handed to you at the end of your next audit and read it with confidence.
The Scope of the Audit
The first section of an audit report summarizes the audit’s scope — in other words, what the auditors did and how they did it. This section will state that the auditor examined the company’s financial statements in accordance with generally accepted auditing standards (GAAS). These standards include well-trained, careful and independent auditors conducting audits.
The section on the scope of the audit will confirm that the auditors assessed:
- The company’s documentation of its finances: These documents include, for example, the company’s balance sheets and statements detailing its earnings and cash flows.
- The company’s underlying financial situation: Auditors will conduct tests to confirm that the information in the company’s documents is consistent with its actual performance.
- The internal controls the company uses: These internal controls describe the measures the company takes to ensure the accuracy and integrity of its financial information.
The scope of the audit section should give you confidence that the auditors have conducted a careful and thorough investigation. That credibility means you can rely upon the second section of the report — the auditor’s opinion.
The Auditor’s Opinion
The second section of the audit report is the auditor’s opinion, which summarizes their findings based on their examination of the company and its records. There are three generally accepted opinions:
- An unqualified opinion: An auditor will issue an unqualified — or “clean” — opinion when the company’s management provides all the relevant documents and information and the audit reveals that the company’s financial statements are accurate. An unqualified opinion will not contain any adverse comments or disclaimers about the limits of the audit.
- A qualified opinion: An auditor will issue a qualified opinion when they are unable to gather necessary evidence or support for one or two areas of the audit. For example, if a company has significant inventory and the auditors are unable to perform an observation to confirm that the actual physical inventory matches the company’s documentation, they would issue a qualified opinion.
- An adverse opinion: An auditor will issue an adverse opinion when a company’s financial statements are not presented in accordance with generally accepted accounting principles (GAAPs). GAAPs are the accounting standards that companies use to measure and present their financial results. An adverse opinion means that the company’s financial documentation is incomplete or inaccurate. This result doesn’t mean the company is deliberately doing something wrong — in many cases, the auditor can work with the company to correct these problems.
Contact Us Today for Audit Services
An accounting audit report can intimidate any business owner, and evidence shows that the audit frequency of small and medium-sized businesses increases with each year. The good news is that you can take proactive steps to prepare and appropriately respond to your next IRS audit.
Marshall Jones has provided audit and assurance services to companies in the Atlanta area since 1984. Our certified public accountants and advisors will help you achieve the technical competencies to simplify audit season. To learn more about how we can help your business with its next audit, contact us online.
