Critical Evaluation of the Current Audit Report Format - Essay Example

Business Report Group Assignment: Evaluation of Current Audit Report Student’s Name Institution Table of Contents Executive Summary An audit report is the end product of an audit. It is prepared and issued by an independent auditor who issues his opinion as to whether the financial statements issued do reflect a true and fair view of the organization’s state of affairs and financial performance as at a particular date. Before issuing of the auditor’s report, the auditor considers whether the organization under audit has kept proper books of accounts, whether the books of accounts have been prepared according to the generally accepted accounting principles, and whether the financial statements prepared reflect the data in the books of accounts. The auditor’s report traditionally has three major paragraphs, the introduction paragraph, the scope paragraph and finally the opinion paragraph. This report has given a recommendation for a change in the audit report format to include a section or commentary paragraph to enable the auditor highlight key information that will be useful in enabling the users to fairly interpret the financial statements. Introduction This report defines the expectation gap that is, the difference in perception between the auditor’s and the users of these auditors’ report. The report gives a critical analysis of the format of the auditor’s report with a view of giving a recommendation on the necessary changes on the format to make it more user-friendly. Business Report Group Assignment: Evaluation of Current Audit Report A. Expectations Gap Auditing expectation gap is a term that is used in signifying the differences in perception and in expectations of the consumers of the financial statements and the expectations of the auditors concerning the financial statements audited. This difference in the expectation comes from the performance, which this is the level of the performance users place and expect the auditor to attain in respect to the actual performance of the auditor (Vinten, 2005). Consequently, according to Vinten (2005) the expectation gap is also the difference in terms of the audit engagement effectiveness. This is the difference in what the users of the audited financial statements believes and what actually the auditor believes in. There is also the difference arising in perception concerning what the auditor does and what the individual auditor actually does. Expectation gap can as well be explained in terms of the difference in the understanding of the general nature of the audit engagement. That is, the differences in perception of what audit is and what it actually is (Vinten, 2005). For auditors to attain reasonable assurance, they should work towards reducing the audit risk to acceptably lower level. It should be noted however that what is reasonable is subjective to both the auditor and the users of the audited financial statements. The subjectivity is what creates the expectations gap. In order to bridge this gap: The users need to be sensitized on the inherent limitations of an audit so that they can understand that audit cannot guarantee an absolute assurance but instead a reasonable assurance. Also, they need to be aware that the audited work requires the auditor’s judgment that cannot necessarily be the best because it is subjective. And lastly, users need to have some relevant level of skills to enable them read and understand the financial statements, since without them, they might not be able to interpret and act on them. This gap is brought about whenever users expect that the auditor should be an investigator and unearth even fraudulent events that are most sophisticated. The users need to be aware that the responsibility to detect frauds is placed with the management and not solely with the auditor alone (Vinten, 2005). B. Critical Evaluation of the Current Audit Report Format Positives of the Current Audit Report Format There are numerous advantages that accrue from having an organization prepare and make use of an audit report. The simplicity of the report makes it easier to be understood. The report’s precision enables the users to interpret it without encountering difficulties. Furthermore, the managers, at a glance, are able to pin point the details of a report on the areas that might need their attention especially on efficiency and profitability. This is possible because by its nature, the report enables the management to better understand the financial systems and the manner in which they work (Caramanis, Leventis & Weetman, n.d.). Consequently, the current audit report, in its format, makes sure that it entails the auditor’s commentary on risks and critical matters facing the entity including the going concern analysis. Thus, all the stakeholders, including the management, the suppliers, the shareholders and the financiers are assured that the organization’s risks are being studied and that the relevant personnel will put in place effective mechanisms to address those challenges. Shortcomings of the Current Audit Report First, the report might fail to detail the frauds that have been committed by the management. This is especially in circumstances where management manipulates the accounts by playing tricks that conceal their inefficiencies. This means that the report might give unqualified opinion instead of a qualified one and vice versa. Second, should the certificate on which the audit is based upon provide wrong information, the entire report will be wrong hence its entire format therefore, rendering the entire audit invalid as it will have not provided the desired results. Third, the report that is presented might as well not serve the intended purpose as desired by the users especially if it is prepared without the auditor having to clarify incorrect information that was used in the course the audit. Thus, the current audit report misses on addressing the possibility of having incorrect details that might result from poor judgment and human error. Fourth, the current audit report format allows for the possibility of failing to portray the true picture of the state of affairs in the company should it be prepared using manipulated data. Fifth, the current audit report format fails to guide the management on key areas of management policies, for instance, the auditor is unable to offer any guidance on the use of capital for future efficiencies. Sixth, in cases where the current audit report format is prepared without the traits of transparency and honesty, it might translate to the failure of the entire system of the audit process and purpose (Caramanis, Leventis & Weetman, n.d.). C. Conclusion and Recommendations The auditing report need to clearly give information to the users and other investors clearly to their satisfaction. There is need for the audit report to be more clear and useful in conveying key information on the matters that are of key importance to the users (Vinten, 2005). Therefore, I recommend that the current format be revised to include first, an auditor’s commentary section or paragraph through which the attention of the users will be called upon on the matters most important according to the judgment of the auditor. These matters will aid the users in understanding better the audited financial statements. Second, it should contain a section that expounds on any new going concern statements for the entity under audit and any key information from the documents of the entity as well as detailing the responsibilities of the auditor and that of the management. Finally, the statement from the auditor should indicate whether any inconsistencies between the audited financial statements and the information from other sources collected as evidenced have been clearly identified and appropriate considerations taken by the auditor. Therefore, the current audit report format should be changed to reflect on the above recommendations. Should the above recommendations be implemented, the users will be assured of a report that will not only portray the true and fair view of the organization’s state performance but will also give key information that will help the users to better understand and interpret the audit report. References Caramanis, C., Leventis, S., & Weetman, P. (n.d.). Determinants of audit report lag: some evidence from the Athens stock exchange. International Journal of Auditing, 9 (1): 45-58 Vinten, G (2005). Audit Expectation-Performance Gap in the United Kingdom in 1999 and Comparison with Gap in New Zealand in 1989-1999. Management Audit Journal, 20:5 Read More