Why do we need the audit report?

An audit report helps users answer one key question: can they have confidence in the audited financial statements? 

It does this by providing an independent, qualified and objective opinion on whether the financial statements give a ‘true and fair view’. But despite its importance, the audit report is often one of the least understood parts of the annual report.

Audit reports are not always easy to read. They can be long, technical and difficult to navigate. Many readers know they are important, but are less clear on what each section means, what auditors are required to say, and where the most useful information can be found. 

How have audit reports evolved?

It wasn’t that long ago that the audit report comprised just one page. It was KPMG that pioneered the first long-form audit report, including KAMs, with its report for Rolls-Royce in 2014. It not only became industry-wide standard practice in the UK but influenced the development of international standards for audit reports. 

KAMs were introduced globally in early 2015 following the International Auditing and Assurance Standards Board's (IAASB) introduction of ISA 701: Communicating Key Audit Matters in the Independent Auditor’s Report. 

KAMs are the issues that, in the auditor’s professional judgement, mattered most during the audit. KAMs are one of the most significant innovations in audit reports – they moved the audit report beyond a simple pass/fail conclusion, to providing insight into where auditors focused their attention and why.

The long-form audit reports of today, therefore, look significantly different to the audit reports two decades ago. 

Why this matters now

Now, the audit report is about to change again. Proposed revisions to ISAs (UK) 700 and 701 aim to modernise, simplify and ‘declutter’ audit reports. The direction of travel is clear: less boilerplate, clearer wording and more useful, entity-specific information.

The proposed revisions come at a time when expectations of corporate reporting are rising. Users want information that is clearer, more relevant and easier to navigate. For auditors, the challenge is not only to comply with the standards, but to communicate well.

Catherine Hardinge, Partner at Price Bailey LLP and member of ICAEW’s Technical and Practical Auditing Committee, adds: “Over the years, audit reports have become longer and more complex. They also include a lot of standard wording. With the proposed changes, some of the standard wording will be removed, hopefully making them clearer.”

A useful audit report should help readers understand auditors’ work, the areas of focus and the conclusions reached. That means plain English, better signposting and less reliance on language that could appear in almost any report.

“Due to the different readers of the accounts, it is important for the audit reports to be easily understandable,” adds Hardinge.

Where to start with the audit report

While it’s recommended for stakeholders to read audit reports in their entirety, they should start with the audit ‘Opinion’ section, which explains whether the auditor considers the financial statements to give a true and fair view. They should also look for any material uncertainty relating to going concern and, where included, the KAMs section. These are the areas that required most auditor attention and are typically areas of higher risk, significant judgement, or complex transactions.

How the Lab can help

ICAEW’s Auditor Reporting Lab is designed to help both readers and writers of audit reports. Its explainer pages deconstruct the audit report, breaking it down into its main parts and explaining each one in clear, simple language.

The Lab also highlights good practice examples, showing how firms can make audit reports clearer, more engaging and more useful without losing the discipline required by auditing standards.

Alongside this, the Lab has commissioned academic research into the language used in audit reports and is developing a practical writing guide for auditors.