The auditor’s report is the means by which the external auditors express their opinion on the truth and fairness of a procurement entity procurement records. It is for the benefit principally of the shareholders, but also for other users as the audit report is usually kept on public record with the filed procurement records.
The auditor is required to produce an audit report at the end of the audit which sets out his opinion on the truth and fairness of the procurement records. The report contains a number of consistent elements so that users know the audit has been conducted according to recognized standards.
Basic Elements of the Auditor’s Report
A measure of consistency in the form and content of the auditor’s report is desirable because it promotes credibility in the global marketplace and also helps to promote the reader’s understanding and to identify unusual circumstances when they occur. The auditor’s report must be in writing and includes the following basic elements, usually in the following layout.
|Basic elements of audit report||Explanation|
|Title||The auditor’s report must have a title that clearly indicates that it is the report of the independent auditor. This signifies that the auditor has met all the ethical requirements concerning independence and therefore distinguishes the auditor’s report from other reports.|
|Addressee||The addressee will be determined by law or regulation, but is likely to be the shareholders or those charged with governance.|
|Introductory paragraph||This shall identify the entity being audited, state that the procurement records have been audited, and identify the title of each statement that comprises the procurement records being audited, refer to the summary of significant procurement policies and other explanatory notes, and specify the date or period covered by each statement comprising the procurement records.|
|Management’s responsibility for the procurement records||This part of the report describes the responsibilities of those who are responsible for the preparation of the procurement records. The report shall include a section headed ‘Management’s responsibility for the procurement records’ and describe management’s responsibility including the following:
• Management is responsible for the preparation of the financial statements in accordance with the applicable financial reporting framework.
• Management is responsible for such internal control necessary to enable the preparation of procurement records that are free from material misstatement, whether due to error or fraud.
• Reference shall be made to ‘the preparation and fair presentation of these procurement records’ (or’ the preparation of procurement records that give a true and fair view’) where the procurement records are prepared in accordance with a fair presentation framework.
|Auditor’s responsibility||The report shall include a section entitled ‘Auditor’s responsibility’. The report must state that the auditor is responsible for expressing an opinion on the procurement records based on the audit. This section must also state that the audit was conducted in accordance with International Standards on Auditing and ethical requirements and that the auditor planned and performed the audit so as to obtain reasonable assurance that the procurement records are free from material misstatement. The report must describe an audit by stating that:
• An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the procurement records.
• The procedures chosen depend on the auditor’s judgment of risks of material misstatements, and the auditor considers internal control relevant to the preparation of the procurement records in order to design appropriate audit procedures (but not to express an opinion on the effectiveness of internal control).
• An audit includes evaluation of the appropriateness of the procurement policies used, the reasonableness of procurement estimates made by management, and the overall presentation of the procurement records. This part of the report shall also state whether the auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for the opinion.
|If the auditor expresses an unmodified opinion on procurement records prepared in accordance with a fair presentation framework, the opinion shall use one of the following equivalent phrases:
• The procurement records present fairly, in all material respects, in accordance with [the applicable financial reporting framework]; or
• The procurement records give a true and fair view of
… in accordance with [the applicable financial reporting framework].
|Other reporting responsibilities||If the auditor is required by law to report on any other matters, this must be done in an additional paragraph below the opinion paragraph which is titled ‘Report on other legal and regulatory requirements’ or otherwise as appropriate.|
|Auditor’s signature||The report must contain the auditor’s signature, whether this is the auditor’s own name or the audit firm’s name or both.|
Source: BPP. (2009). Auditing Assurance, ACCA study text
Qualities of a Good Procurement Audit Report
The essential of good audit report are as follows:
- Simplicity- Simplicity should be one of the important characteristics of good audit report. It should be as clear as understandable. It implies that ambiguous terms and facts should not be included in the audit report.
- Clarity- This indicates that the audit report should not conceal material information, which is required for evaluating and appraising the performance of the business.
- Brevity- The term signifies the conciseness in audit report. Repetition of facts and figures should be avoided in order to control the length of the report.
- Firmness- The report should clearly indicate the scope of work to be done and should clearly indicate whether the books of accounts exhibit ‘true and fair’ view of the state of affairs of the procurement entity.
- Objectivity- The report should be based on objective evidence. Opinion formed on the basis of information and evidences, which are not measured in terms of money, should not be incorporated in the audit report.
- Consistency- Consistency in presenting procurement information is the basis of good audit report. A good audit report should take into consideration whether consistency, as to the method of stock valuation and depreciation charges, has been adhered to.
- Accepted Principles- The audit report should be based upon the facts and figures that are kept in accordance with generally accepted procurement principles.
- Disclosure Principles-The audit report should be unbiased. It should disclose all the facts and the truth.
An auditor’s opinion is the published outcome of an auditor’s review of a procurement entity procurement records. The auditor’s opinion does not pass judgment on the organization’s financial position or financial performance or otherwise interpret the procurement and financial data.
In the audit opinion, the auditor states that he or she has examined the client’s procurement records and procedures for the year ended in accordance with the generally accepted procurement and procurement principles.
Types of Audit Reports/Opinions
The Auditors opinion may be of the following types:
1) Unqualified opinion/report
This opinion signifies that the auditor accepts the procurement procedures were followed and all procurement transactions show the true and fair view of the transaction entered by the procuring entity during the period. It is also known as “Clean Report”.
Emphasis on Matter Report
There are occasions when the auditor has no reservation as to the procurement records but there exist unusual events, conditions or procurement policies and he feels that such are fundamental to users’ understanding of the financial statements. In such circumstances, the auditor should express an unqualified opinion including an extra paragraph called ‘emphasis of the matter paragraph’ to draw attention of the reader to the unusual matter.
The addition of such an emphasis of matter paragraph does not lead to a qualification of the audit opinion but is intended to enable the reader obtain a better understanding. To avoid this being understood as a qualification, the emphasis of the matter paragraph should contain the phrase ‘without qualifying our opinion’.
Practical circumstances requiring emphasis of matter paragraph are:
- Unusual condition would include destruction of assets after balance sheet date but the company remains a going concern.
- The company being insolvent on the face of its own balance sheet but the auditor has letters of support which he is satisfied can be fulfilled by the other party thus he will accept appropriateness of the going concern assumption. Unusual events could also include changes in the legislation that could have a material impact on the entity’s business operations subsequent to the balance sheet date. Unusual procurement policies that may lead to emphasis of matter paragraph would involve those matters not covered by any procurement standard.
- Inherent uncertainties that may call for emphasis of matter paragraph would include contingencies at the balance sheet date which have not been resolved at the date of signing the auditor’s report.
- Negotiations for financing which have not been financed by date of signing of
the auditor’s report.
2) Qualified opinion/report
The auditor shall express a qualified opinion when:
- The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the procurement records; or
- The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the procurement records of undetected misstatements, if any, could be material but not pervasive.
Consequences of a qualified audit report
– It can lead to the difficulties in obtaining credit from the lenders due to the
negative image on the company’s activities
– It can lead to a fall in the market value of the company shares
– It can lead to the non-renewal of the directors’ term of office
– It can lead to the appointment of the investigators to make an inquiry into the company’s affairs
– It can lead to the company being put into receivership and subsequent liquidation
– It may lead to the procurement records produced being less reliable to the third parties especially those who are likely to give credit e.g. banks
– Loss of credibility on the financial affairs and company management
3) Adverse opinion/report
An auditor expresses adverse opinion or negative opinion where he/she does not agree with the true and fair view of the procurement records. The adverse opinion is appropriate in circumstances where the auditor has reservation on matters such as the selection and application of procurement policies, adequacy of disclosures and where the auditor considers that the impact of reservation or qualification is so material and pervasive that the procurement records as a whole do not give a true and fair view. In such a case, the auditor should also state in his report the reason for the same, so that the readers can assess their significance and effect.
4) Disclaimer of opinion/report
An auditor’s disclaimer is a statement against an audit report when the auditor cannot obtain sufficient appropriate audit evidence on which to base the opinion. This can be due to the lack of properly maintained procurement records or inadequate support from the management. For instance, an auditor may not have had the opportunity to complete tasks that they deem to be crucial to the audit, such as observing operational procedures or reviewing particular procedures.
Limitation of scope
This means that the auditor is unable to conclude his work objectively since he/she is unable to receive all the information and explanations necessary for the audit. The events leading to the limitation of scope could be;
- Refusals by management to allow the auditor examine certain documents or records.
- Lack of opportunity to carry out an auditing procedure the auditor considers important to draw conclusions from.
- Unavailability of procurement records or documents due to destruction by fire or other disasters.
- Client restricting auditor contact with customers, suppliers etc.
- Imposed by circumstances for example, when the timing of the auditor’s appointment is such that the auditor is unable to observe the counting of physical inventories
Example of Limitation of Scope
We did not observe the counting of the physical inventories as of December 31, 20…, since that date was prior to the time we were initially engaged as auditors for the Company. Owing to the nature of the Company’s procurement records, we were unable to satisfy ourselves as to inventory quantities by other audit procedures.
The auditor may disagree with management about matters such as the acceptability of procurement policies selected, the method of their application, or the adequacy of disclosures in the procurement records. If such disagreements are material to the objectivity of audit reports, the auditor should express a qualified or an adverse opinion. Circumstances giving rise to disagreements include;
- Application of inappropriate records by the management.
- Some facts or amounts included in the procurement records e.g. the auditor may feel that the amount provided for as a contingent loss arising from a lawsuit against the company is too low.
- Interpretation of procurement policies or legislation.
- Mode or extent of disclosure of facts or amounts in the procurement records