The dust has settled and, after much back and forth, your auditor’s report is now in your hands. But what exactly are you looking at and what are you supposed to do with it? That’s what this article attempts to help you understand.
Re-read the engagement letter before you do a review
Reading through the original engagement letter again is a great opportunity to refresh your memory and make sure you understand the exact scope and framework of what the audit was intended to accomplish. You can use this document as a sort of “roadmap” to help you know what to expect in the audit report.
If you don’t have an engagement letter from your auditor, their audit proposal can serve the same purpose, spelling out the scope of the audit and who was responsible for doing what.
The engagement letter (or audit proposal) usually contains the following key information:
- Detailed description of services to be performed by the audit firm
- What the organization’s staff is responsible for doing
- What fees will be charged for the audit and related work
- Start date and completion date
Now you should have a good idea of what you should expect when you read the audit package prepared by the audit firm.
Start with the draft version of the auditor’s report
You and your finance and accounting team will need to carefully review the results of the auditor’s report. It’s an opportunity for your leadership to review draft versions of all financial statements and letters before the auditor presents to your Board of Directors.
Here’s what you’ll receive:
- Financial statements (including footnotes)
- Management letter
- Audit grouping reports, also known as the classified trial balance (if not already provided)
- Adjusting journal entries
Reading the independent auditor’s report
This document articulates if the financial statements your organization submitted are deemed fair and it delivers an opinion as to whether they conform to accepted accounting principles. The report will also address any other issues such as any material weaknesses in your organization’s financial statements.
You will receive one of four possible opinions:
1. Unmodified. This is a clean audit that the organization should use to establish a continuing goal.
2. Modified. This is where the auditors discovered situations where the organization isn’t following generally accepted accounting principles but there is no overall material misstatement of any financial position(s). This opinion may not be ideal but it is definitely preferable to an adverse opinion or disclaimer opinion.
3. Adverse. Auditors found a material misstatement or evidence that the organization isn’t conforming to generally accepted accounting principles.
4. Disclaimer of Opinion. The auditors refuse to offer an opinion because for some reason they were prevented from doing so. For example, the auditor believes they received insufficient or unreliable information.