What is an audited financial statement? Who needs it?

When you apply for business financing, lenders and investors want to make sure that they don’t waste money on the opportunities you present; that’s why you brought detailed financial statements to your presentation meeting. If, however, the people you introduce to are still unsure about your business finances, it may be because you did not prepare an audited financial statement. Read on to find out what an audited financial statement is and how it differs from an unaudited financial statement.

What is an audited financial statement?

a audited financial report is any financial statement that a Chartered Accountant (CPA) has audited. When a CPA audits a financial statement, it will ensure that it complies with general accounting principles and auditing standards. Without this CPA verification, inventors and lenders may not be sure that the statement you are making is accurate.

How is an audited report different from other types of accounting reports?

When you think of the word “audit,” the IRS may come to mind first. This is because audits are often associated with the IRS investigating taxpayers for possible tax reporting inaccuracies. As such, you might view audits as a punishment, but they aren’t – for your financials, they can actually be beneficial, if not paramount. To understand why, compare an audited report to two other types of accounting reports:

  • Compiled reports. Any accountant can prepare a compiled report, which is just a basic financial statement. This is called a compiled report because your accountant generates it by compiling your financial records in a widely accepted financial statement format. However, when writing this report, your accountant will not verify if the information you have given him is correct and will say so in the report.
  • Reports reviewed. A revised report undergoes a little more scrutiny than a compiled report. For these reports, your accountant will use limited analytical procedures and submit a small number of requests to your management. Through this work, your accountant will determine if your financial statements require substantial changes. Your accountant will also verify that your business uses generally accepted accounting principles, but they will not test your protocols.
  • Audited reports. An audited report involves a thorough examination of every element of a financial statement. It also involves internal protocol testing to ensure that the money is flowing through your business in a way that your reports accurately reflect. As such, an audit is proof that your financial statements are perfectly accurate.

Who should prepare the audited statements?

Any business presenting its financial statements to investors or lenders must prepare audited financial statements. The vast majority of potential funders for your business will ask for audited financial statements instead of unaudited ones since the latter are leaving. much less margin for error.

Additionally, if your business is publicly traded, you will need to prepare annual audited financial statements. While federal regulators require publicly traded companies to file verified returns, you can regularly create unaudited ones throughout the year if they help you assess your finances.

Types of audited financial statements

There are four main types of financial statements that may merit an audit:

  • Balance sheet. A balance sheet details the total assets, equity and debt of your business at any given time. It is often seen as a snapshot of your business performance.
  • Statement of cash flows. A cash flow statement details the amounts of cash and cash equivalents entering and leaving your business bank accounts. Cash equivalents include overdrafts, bank deposits, assets convertible into cash and short-term investments. For this type of statement, liquidity includes both available liquidity and liquidity stored in demand deposits.
  • Income statement. An income statement, also known as an income statement, details the income of your business after all expenses and losses. While a balance sheet is a snapshot of your business’ performance, an income statement captures that performance over an extended period of time. It usually includes measures such as gross profit, net profit, income, expense, cost of goods sold, taxes, and pre-tax profit.
  • Statement of equity. Although often included on the balance sheet, the statement of equity can also be prepared separately. It details all of the changes made to your company’s shareholder value during an accounting period. The increase in fairness indicates good business practice while the decrease in fairness may indicate the opposite.

What are the stages of an audited financial statement?

A CPA verifying a financial statement will typically go through these three steps:

  1. Industrial research and risk assessment. For a proper audit, a CPA needs to learn not only about your business, but also its industry and competitors. Armed with this knowledge, they may be better able to identify risks that could affect the accuracy of your financial statements.
  2. Internal control tests. Your CPA will test your company’s internal controls to understand its processes for employee authorization, delegation of responsibilities, and asset protection. After identifying these workflows, your CPA will conduct monitoring procedures to verify their soundness. A strong set of procedures may merit a more complex audit, and a weak set of procedures may require additional financial assessments.
  3. Thorough verification of the declaration. After the first two steps, your CPA will verify every element of a financial statement. For example, if your CPA is checking your accounts payable, they may contact companies with which you have unfinished invoices to verify how much you owe. After this step, your CPA will be ready to offer an opinion letter, which we’ll discuss in more detail below.

What is included in an audited financial statement?

An audited financial statement includes the following information:

  • CPA verification. Even if you meticulously track all your business expenses and income, you could make mistakes. When you hire a CPA to audit your financial statements, you minimize these errors and move your statement closer to full accuracy.
  • On-site inspection. For a verified financial statement, a CPA will comb your finances, but sometimes that’s not all. If parts of your financial statements include reports on your inventory, your CPA may also personally inspect your inventory to make sure there are no gaps in the inventory counts.
  • Internal control inspection. If your team includes employees who monitor your company’s expenses – especially if those employees have little or no oversight or double-checking from other team members – your CPA may inspect their work. This is because with so little daily monitoring, there is always a chance (although perhaps a tiny) that these employees could tamper with your books or commit fraud. [Read related article: Should You Audit Your Bookkeeper?]

Opinion letter

To summarize the above information, your CPA will provide you with an opinion letter detailing their views on your financial statements. There are four types of opinions on CPA financial statements:

  • Unmodified notice. Also known as an unqualified opinion, when a CPA gives that opinion, it means that you have prepared your financial statements accurately using standard and acceptable accounting and accounting practices.
  • Qualified opinion. If you receive this opinion, your CPA believes that there are a few shortcomings in your financial statement preparation, accounting and / or bookkeeping. Your CPA will detail these issues and how you can resolve them, and once you’ve rectified your mistakes, you can request an unmodified review.
  • Opposing opinion. This opinion means that your financial statements are inaccurate, with more than a relatively insignificant number of deficiencies. This means that investors, lenders, and other funders should not trust the information in your financial statements. Here too, your CPA will explain your journey to set your options and allow you to come back for an unmodified review.
  • Disclaimer. This result is not an opinion, but a lack of one. This means you haven’t given your CPA the access, information, or time needed for a full audit.

What is the difference between audited and unaudited financial statements?

When you compare audited and unaudited financial statements, you will notice the following key differences:

  • Creation. Any accountant can create an unaudited financial statement. Only a CPA can create an audited financial statement.
  • Confidence. When you present an unaudited financial statement, the person reviewing it may not entirely believe it is correct. An audited financial statement is, by definition, thoroughly and professionally reviewed, eliminating any doubt as to its accuracy.
  • Time. An unaudited financial statement is fairly quick and straightforward to generate. Your accountant simply compiles all of your financial information into one document. In contrast, an audited financial statement will likely take weeks, if not months.
  • Cost. Unaudited financial statements cost less money to generate than audited financial statements. This is because whether your in-house accounting team prepares them or you hire a third-party accountant, you won’t pay as much as you would to hire a CPA.
  • Legitimacy. When applying for additional business financing, you will likely need to present audited financial statements. Because unaudited financial statements do not include guarantees of accuracy, lenders and investors often do not view them as legitimate.

From these differences, you can see that the fundamental characteristic of audited financial statements is the involvement of CPAs. To learn more about the differences between CPAs and traditional accountants, and how you can hire either one for your business, read our article: How to Hire the Right Accountant for Your Business.

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