Audit Report Break Down
Monday April 11, 2022
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Hey. So as you might know, I am a former auditor. And what I realized is I wanted to give you a breakdown of some audit things, and I haven't yet done that. So be sure to check out, we have an episode, 'Are You Audit Ready?', that talks about some of the things that go into preparing for the audit. These next couple of episodes are going to be more about the audit outcomes. And so, first up is the audit report.
So the audit report, this is what everyone wants. So when people say, "Hey, we need an audit", what they really want is this letter that says, "We did the audit. This is what we did. This is our opinion." So I'm going to break down that letter and tell you what it means, what's included. And in essence, there are three components. So every audit letter is going to have three pieces.
The first piece is management's responsibility. This is to make sure everyone is clear about what is the responsibility of the people being audited. And essentially, their responsibility is to give a fair and accurate representation of the financial statements in accordance with acceptable accounting principles, wherever you are located. I'm US based, so we are going to talk about US. So this includes designing, implementing, and maintaining the internal controls, making sure the financial statements don't have any big, what is called material misstatements. So this is when there's something wrong, and this can be because there's fraud or there was just a mistake. So it's not an intentional issue. This was not like someone's trying to hide anything. It's just like, "Oh, well, this thing was done incorrectly."
And the reason this is important is because oftentimes I used to hear the management would be like, "Well, whatever entries you guys propose, that's what you guys are making us do." The auditors are not making you do anything. It is your financial statements. If you don't agree with the auditors, you can say, "Actually, no, we're not going to post that. We're not going to make that change because that change is not correct." And while that might affect your opinion, if it's the truth, that is what it is. We'll do an episode where we talk about some rebuttals you can do, but essentially, that is why this letter is important, is to remind everyone the management, the organization, is responsible for the actual financial statements and what's in them.
So the next piece is what the auditor is responsible for. So management is responsible for the financial statements. They're responsible for making sure internal controls exist and work. They're responsible for making sure that the financial statements are accurate. The responsibility of the auditor is to say, "Hmm, we've looked at this and now we are comfortable making an opinion." So that's all the auditor is responsible for, is to say there is an opinion on it. They are not responsible for creating internal controls. They are not responsible for drafting the financial statements. That is all actually the responsibility of management.
Again, the auditor is just saying, "We are going to evaluate things and we are going to give you our opinion on this. We are going to say, 'Are the financial statements reasonably stated? Are we comfortable enough that there are not any big errors? Did we look at enough audit evidence that gives us comfort in that?'" So now you know what management is responsible for: internal controls, the financial statement; what the auditors are responsible for: giving you an opinion, and now we'll dig into the opinion.
More recently, instead of using unqualified and qualified, it's unmodified, being good, and a modified opinion. Another thing I wanted to point out is that when your auditor is saying that, "Oh, there's a modification, a disclaimer, or adverse," they're going to say in their audit opinion what that was. So they're going to give you, "Oh, we were missing inventory information, or we were missing the information related to your planned assets." So every opinion is going to give you a little bit more details about why exactly it's giving the opinion it's giving, unless it's just so general that it's like everything is incorrect. But usually they want to pinpoint it just so anyone reading it can have a better idea of what's causing the opinion.
So there are four opinions when it comes to an audit report. What you want, although it sounds weird, is an unqualified opinion. So this is an opinion that says, "There are no buts included in this. We saw things, we reviewed it, we did our testing, and we feel they've done a great job. They've done what they needed to do. They made the necessary corrections."
So sometimes people are like, "Well, if we had audit adjustments, how did we still get an unqualified opinion?" You can still get an unqualified opinion even if the auditor gives you adjustments because you have made the corrections. So that's all the auditor is saying, is that, "Even if something came up, we talked about it to management, management agreed, because it's their financials, and management has said, 'Yes. We agree, we're going to create that correction, we know what to do moving forward'".
The next opinion is a qualified opinion. This is where sometimes you can get, "Oh, there is one piece that we were able to identify, we could quantify, we could see how far it goes, and we can say, 'okay, except for this one thing, the financial statements are accurate'". And so, this is called a qualified opinion. We're giving a qualification. It's everything, but this one piece. We are comfortable, we think it's materially correct. We're not worried about the financials. So if you are getting your audit, you want to be within these two realms, of an unqualified, everything went well. There are no big deals. We're good to go. And then, there's the qualified opinion of everything but this one thing we were able to determine.
The next one is an adverse opinion. An adverse opinion means, you know what? Things are so bad we can't give an opinion on this. And this is where you don't want to be. You don't want to be in an adverse opinion just because you're just like, "Things are that bad I honestly would rather have a disclaimer." So a disclaimer is where the auditor just like, "I'm not even giving an opinion." So I'd rather get no opinion than an adverse opinion. This is just me personally. So an adverse opinion is when they're like, "There are so many problems here." A disclaimer, on the other hand, is just saying, "You know what? We can't give you an opinion at all because there aren't financial records, there's missing cooperation we can't do our job at. So we can't even get to the point where we can say it's bad."
I'd rather personally say that, "I can't tell if it's bad", than, "You know what? It's terrible, and these folks are not even letting me do a thing." So again, that's just my personal opinion, but I wanted again to break down what these options are because sometimes people say, "Ooh, we want to be qualified. We want people to say that we can do." And yes, qualified is good, but that's not great. So you definitely want to go for an unqualified opinion.
One of the things you could do in preparation for your audit is actually have someone come in and review, and not do a financial review where they're going to give you again an opinion, but one where they're saying, "What are the gaps that we're seeing your system, where we think that this might be a hindrance for your audit?"The first audit for any organization is a little rocky. It might be rocky every year, just because the audit team change at your organization. It's a stressful time for everyone. But you might want to go ahead and say, "Hey, we'd love some sort of preliminary walkthrough of where things are and where we think we might have some areas of concern."
You can hire people to assist in your audit preparation. They might be able to give you a heads up of like, "Ooh, hey, this is something I noticed, and I think your auditors are going to be concerned, or I'm concerned." Definitely check that out. It is something that we here at CNRG are happy to help people with, is their audit preparation, and we do it for our clients. And it's one way, especially when we are not the ones who did the additional work, that we can help you see, okay, here's some areas for improvement, because that is the other takeaway from the auditors, is where could we improve? So that'll be the actual next episode.
All right, until next time. Thanks for tuning in for another episode of The Nonprofit Ace Podcast. I'm your host, Chyla Graham. Be sure to follow us on social media, we are @CNRGAdvisory on social media, and subscribe wherever you are tuning in. And I'd love a review. So if you can give me some feedback, what do you love about the show? What would you like to see different? I would be open to that. We're looking at some changes in the future, and so be sure to give me some info.
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Podcast Episode: “Are You Audit Ready?”