- What is an Audited Financial Statement?
- Who Prepares Audited Financial Statements?
- Types of Financial Reports
- What is Included in a Financial Audit?
- What are the Different Types of Audited Financial Statements?
- Audited vs. Unaudited Financial Statements
If you’re looking for funding for your business, you already know that you need comprehensive financial statements. However, the usual statements may not be enough to satisfy potential lenders, investors, or external stakeholders. In fact, they may require an external check to verify that the documents are accurate. In that case, you may have to provide audited financial statements. So what exactly are audited financial statements, and how can you get them?
You will learn what audited financial statements are, who needs them, and who does them. You will also learn what is included in an audited statement, as well as the types available. Finally, you will learn the differences between audited and unaudited financial statements.
What is an Audited Financial Statement?
An audited financial statement is a financial statement that has been audited by a Certified Public Accountant (CPA). This external audit ensures that the document and its contents are accurate and adhere to the appropriate auditing standards and accounting principles. The CPA will provide an audited financial report.
Who Prepares Audited Financial Statements?
Audited financial statements are those that have been reviewed and verified as accurate by a Certified Public Accountant (CPA). Any company may require audited statements for internal use or to present to external stakeholders. The company prepares the financial statements and presents them to a CPA for assessment.
Types of Financial Reports
Financial statement reports can take different forms depending on the level of scrutiny:
The most basic is the compiled report, which any accountant can produce by compiling your financial records into an accepted format. However, the accountant only compiles your records but doesn’t check the content's accuracy.
For a reviewed report, the accountant will carry out an analysis to determine whether significant changes need to be made to the documents. The accountant will check, but not test, that your company adheres to generally accepted accounting principles (GAAP). If necessary, the accountant may ask management for clarification of specific points.
Finally, there is the audited report, in which a CPA scrutinizes every single item on the financial statement. For this type of report, the CPA not only checks that you adhere to GAAP but will also test your protocols. In other words, the auditor’s verification provides proof of the accuracy of your financial statement.
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What is Included in a Financial Audit?
An audit of your financial statements will include the components described below.
Verification from CPA
The CPA will thoroughly verify the accuracy of your financial statements. This involves checking each line item, and they may even reach out to related third parties to check on the status of transactions.
If your financial statements contain items related to inventory, the CPA may carry out a site inspection. This allows the CPA to check on stock levels and identify any inconsistencies.
Depending on your company’s specific structure and monitoring policies, the CPA may also need to review the work of any employees in charge of monitoring spending. This is usually done in cases where these employees undergo little supervision or regular checks.
The CPA will include an opinion letter summarizing the findings from the stages listed above. Below, you will find the four types of financial statement opinions.
- Unqualified: An unqualified opinion from the CPA indicates that you have prepared your financial statements accurately and according to acceptable bookkeeping and accounting practices and standards.
- Qualified: A qualified opinion indicates that the CPA found some issues. These are usually small gaps in your bookkeeping, accounting, or preparation of your financial statements. The opinion letter will include the specific issues and how they should be addressed.
- Adverse: An adverse opinion indicates that your financial statements are inaccurate and should not be trusted. In other words, it’s not just a matter of small gaps but more serious issues. The CPA will include details of these issues and how to address them.
- Disclaimer: When CPAs issue a disclaimer of opinion, it means they cannot provide one because they were denied the required information, access, or time to complete the audit.
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What are the Different Types of Audited Financial Statements?
As you know, there are many types of financial statements, each focusing on different aspects of the company’s finances. The frequency with which they are compiled depends on various factors, including your industry. In fact, a company may be required to present them quarterly or even annually but also decide to produce them monthly for internal purposes.
The balance sheet provides a balanced view of a company’s assets, liabilities, and equity. It provides a snapshot of the company’s financial position on a given date. To learn more about this, check out this guide on How to Read a Balance Sheet (with Examples).
The income statement, also known as the profit and loss statement, reports the company’s operations during a given period of time. The statement includes details on all revenue and expenses.
Statement of Cash Flows
The statement of cash flows shows how the company’s activities affect its cash and cash equivalents. The statement provides information on three types of activities: operating, investing, and financing.
Statement of Shareholder Equity
In many cases, the statement of shareholder equity is included as a section of the balance sheet. However, it can also be prepared separately. The statement provides details on changes to the company’s value to shareholders during a given period of time.
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Audited vs. Unaudited Financial Statements
Now that you know about audited financial statements let’s review the differences between audited and unaudited financial statements.
- Creation: While any accountant can compile financial statements, only CPAs can produce audited reports of your financial statements.
- Trust & legitimacy: As mentioned above, any accountant can prepare a compiled report. In other words, external stakeholders and potential lenders have no particular reason to trust the contents. Audited reports are prepared by CPAs, and both the statements and the financial controls undergo rigorous scrutiny.
- Cost: As you may have guessed, audited reports are also more expensive and more time-consuming. You will have to employ a CPA's services and ensure they have access to everything. The process is very thorough, which can take a while (depending on the size and complexity of your business).
As you have seen, there are many reasons why a company may want to audit its financial statements. You may want to audit your statements for internal use to ensure that your statements are accurate and that you’re adhering to the relevant requirements and regulations. Alternatively, you may need to audit your financial statements to present them to external stakeholders or potential lenders and investors. While the auditing process can cost a lot of time and money, it provides legitimacy and verifies the accuracy of your financial statements.
You now know what an audited financial statement is, who does the auditing, and how it can help your business. You also know about the different types of audited financial statements and what’s included in an audited financial report. Finally, you have reviewed the differences between audited and unaudited financial statements.
To learn more about financial statements and how to analyze them, have a look at these guides: