The goal of an audit is to form and express an opinion on financial statements. The audit is performed to get reasonable assurance on whether the financial statements are free of material misstatement. An audit also includes assessing the accounting principles used and the significant estimates made by the management. Audit conclusions and reporting are one of the principles governing an audit. Reporting is the last procedure of the process of an audit.
An audit involves the following steps: Gathering of audit evidence, evaluation of the evidence, deciding on their reliability and acceptability, drawing a conclusion based on such evaluations, forming an opinion based on a set of conclusions and expressing an opinion. The auditor should get sufficient and appropriate audit evidence both at the transaction level, as well as the account level. He should evaluate the adequacy of the evidence in his possession, both in terms of quality and quantity. The auditor should draw a conclusion on each of the line items of the financial statements, based on the transactions examined by him. A set of conclusions, on such line items, leads to forming an opinion on the financial statements as a whole, both at the transaction level as well as at the account level, which, he should express in his report without any fear or favour.
Gathering of audit evidence: An auditor should be thorough in his efforts to gather the audit evidence, and be impartial in its evaluation. Substantive procedures such as enquiry, information, confirmation, observation, compilation, verification and valuation, etc. are used to substantiate the transactions. Carrying out such procedures on a reasonable number of transactions provides a basis for drawing a conclusion on a particular head of account (line item). Having gathered the audit evidence by substantive procedures, the auditor should ensure that the entity has complied with the necessary requirements such as requirements of law, applicable Accounting Standards issued by the ICAI/ NACAS , accounting policies adapted by the entity from time to time, and internal control systems.
Evaluation of audit evidence: Having gathered the audit evidence, the auditor goes through the evidence with a fine-toothed comb to properly evaluate it, judge their reliability and draw logical conclusions. He has to document the reasons for accepting or rejecting certain replies and reports.
Analysis of evidence: The auditor uses analytical procedures such as accounting ratios, analyses; intercompany comparisons, comparing the industry norm with the data of the unit, etc. to analyse the data.
Audit conclusions: Such analyses help the auditor to draw conclusions regarding various aspects of the line items of the financial statements. These conclusions should be independent and factual, and not based on assumptions. A set of such conclusions leads to forming an opinion.
Compliance with code of conduct: Professional ethics of the ICAI hold an auditor guilty of professional misconduct for negligence if he doesn't gather enough evidence to justify his opinion. He would be liable if the evidence in his possession is contradictory to the opinion expressed by him. This makes drawing a conclusion a critical aspect of an audit.
EXPRESSION OF OPINION
The auditor discusses his observations with those charged with governance, such as the audit committee of the company, before finalising the report. The auditor should be firm in his opinion, and exercise his independence at this level. This part of the audit is critical, and calls for resilience on the part of the auditor. An audit report, being a public document, should be drafted skilfully. The code of conduct prohibits an auditor from divulging any information received by him in the course of his professional assignment, unless legally required so to do. Therefore, the auditor shouldn't hesitate to take the help of a legal expert on whether to include certain comments in his report.
(The author is a Hyderabad-based chartered accountant.)