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Audit reports of a private company conveys the extent of compliance with the Generally Accepted Accounting Principles (GAAP) for the financial statements under review, and whether the standards adopted remain consistent with the standards adopted in the previous years. Such a report is an essential document for investors, shareholders, debtors, regulatory agencies, customers, and other stakeholders to ensure the financial integrity of the company. Investors especially require the audit report to make sense of the company’s financial information.
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Structure of the Audit Report
So, what is included on an audit report of a private company?
Standard audit reports consist of three paragraphs that detail the scope of the audit, the methodology of conducting the audit, and the final opinion. Unfavorable audit reports include a fourth paragraph that details the specific issues or inconsistencies.
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The audit report does not concern itself with the correctness of the figures per se, or whether the company has made the right financial decisions, but rather limits itself to an opinion on whether the financial statements remain compliant with the Generally Accepted Accounting Principles, and whether the statements are free or not of material misstatement.
Private company audit reports also indicate whether the company is a “going concern" or not. A “going concern" has the financial strength and healthy cash flows to absorb any adverse impact and continue regular operations into the foreseeable future without defaulting on liabilities. In other words, the “going concern" does not face any imminent financial emergency. If the auditors have doubts on whether the company is a going concern, they express the basis of such doubts in the audit report.
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The basis of the audit report is an examination of the balance sheets and related financial statements such as income statement and cash flow statement for the present year and previous year.
The auditors undertake the following activities when preparing an audit report:
- Making an assessment of the accounting principles used to prepare the balance sheet and other financial statements
- Checking the basis for the estimates made in the balance sheet and other financial statements
- Examining the evidence to substantiate the amount and disclosures in the financial statements
- Evaluating the overall financial statement presentation.
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Nature of Report
Positive audit reports or unqualified opinions indicate the financial statements of the company remain consistent with the previous years and comply with the Generally Accepted Accounting Principles (GAAP).
Negative audit reports or adverse opinion audit reports indicate the company’s financial statements are deceptive, inconsistent, and not compliant with GAAP.
The audit report could also be a mix of the two, stating anything in between, or that some statements or some items in the financial statements do not comply with GAAP or are inconsistent. A Qualified Opinion audit report indicates some exception to certain accounting applications in the current financial year, the full implication or outcome of which remains uncertain.
Audit reports remain the opinion of the auditors, and are not sacrosanct. The independent nature of the auditors nevertheless provides an objective review of company finances and compliance. Investors, creditors, regulatory authorities, and even customers looking for long term relationship with the company place high value on audit reports. Private company find the going tough with a negative audit report, as it remains a blot and investors and other stakeholders may shun the company.
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- Dana S. Beane & Company, P.C. “Sample Audit Opinion For Business Entity." http://www.dsbcpas.com/services/accounting/audit/opinionaudit.html. Retrieved April 20, 2011.
- "Understanding the Auditor's Report." http://www.crfonline.org/orc/cro/cro-11.html. retrieved April 20, 2011.
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