What is an Audited Financial Statement and Why It Matters

Financial statements provide a snapshot of a company’s financial health They communicate important information to business owners, investors, lenders, and other stakeholders But how can you ensure the accuracy and reliability of these critical documents? The answer is an audited financial statement.

This comprehensive guide examines what an audited financial statement is, the key components involved, and why they are vital for companies seeking funding and credibility.

What is an Audited Financial Statement?

An audited financial statement is a financial statement that has been rigorously reviewed and verified for accuracy and compliance by an independent certified public accountant (CPA)

The audit process examines the company’s internal controls accounting practices and financial reports to confirm they conform to accounting standards like GAAP or IFRS. Audits also validate that financial statements are free of material misstatements.

Essentially, an audit provides third-party confirmation that a company’s financial information can be trusted.

4 Key Types of Audited Financial Statements

There are four primary financial documents that are commonly audited:

• Balance sheet – Provides a snapshot of assets, liabilities, and equity on a certain date.

• Income statement – Summarizes revenue and expenses over a period of time. Also known as a profit and loss statement.

• Cash flow statement – Shows inflows and outflows of cash within an accounting period.

• Statement of changes in equity – Details changes in equity accounts like share capital and retained earnings.

The 3 Main Stages of a Financial Statement Audit

Conducting a standard audit involves three key phases:

1. Risk Assessment and Planning

• Gather background on the company and industry.
• Assess material risks that could impact financial reporting.
• Develop an audit strategy and plan.

2. Testing Internal Controls

• Examine the company’s internal control processes and procedures.
• Assess the risk of misstatement due to error or fraud.
• Identify control deficiencies.

3. Verifying Financial Statement Accuracy

• Inspect documentation supporting account balances.
• Perform analytical procedures to check reasonableness of balances.
• Request confirmation of balances from third parties.
• Evaluate disclosures and presentation of financial statements.

What is Included in an Audited Financial Statement?

An audited financial statement consists of several integral components:

• The financial statements themselves including relevant notes and disclosures.

• An audit opinion signed by the CPA firm stating their assessment of the financial statements.

• A report detailing the scope, fieldwork, and methodology used for the audit procedures.

• A section outlining any internal control deficiencies identified during testing.

• Management representation letter confirming responsibility for financial statement accuracy.

4 Types of Audit Opinions

The audit opinion offers the auditor’s professional judgement on the financial statements. There are four standard opinions:

• Unmodified opinion – Financial statements are materially correct and presented fairly. This is the standard clean audit opinion.

• Qualified opinion – Statements are fairly presented with certain exceptions noted. Issues are not pervasive.

• Adverse opinion – Financial statements do not conform to GAAP due to material misstatements.

• Disclaimer of opinion – The auditor could not form an opinion due to major scope limitations.

The type of opinion directly impacts the perceived reliability of the financial statements. An unmodified opinion provides the highest level of credibility.

Key Differences: Audited vs. Unaudited Statements

Unaudited financial statements have not undergone an independent verification process. Here are some major differences:

• Preparation – Anyone can prepare unaudited statements. Only CPAs perform audits.

• Accuracy – Unaudited statements may contain errors. Audited versions are validated.

• Cost – Audits add time and expenses to the process.

• Mandatory? – Public companies must have audited annual statements. Private companies can use unaudited reports.

• Credibility – Audited statements are more trusted by outsiders like investors.

Why are Audited Financial Statements Important?

There are several compelling reasons why audited financial statements are vital:

• Reduces errors – The audit identifies and corrects inaccuracies in reporting.

• Detects fraud – Auditors may uncover signs of fraudulent financial reporting.

• Validates processes – Audits ensure proper controls and procedures are in place.

• Inspires investor confidence – Audits provide reassurance to investors, shareholders and lenders.

• Meets requirements – Public companies must prepare audited financials to comply with regulations.

• Supports valuations – Audits help establish an accurate company valuation for transactions.

• Enhances credibility – Audited statements are essential for companies seeking funding and capital. They carry more legitimacy than unaudited versions.

In short, audited financial statements inspire trust and confidence for key stakeholders. They signal that a company’s finances have been verified by an impartial third party.

Who Needs Audited Financial Statements?

While audits are optional for private companies, there are certain situations where audited financial statements become essential:

• Raising capital through issuing stock or debt instruments

• Seeking funding from investors or lenders

• Participating in mergers, acquisitions, or sales transactions

• Applying for loans or lines of credit

• Meeting requirements for participation in government programs

• Satisfying affiliation or partnership agreements

Any private company looking to prove its credibility and substantiate its financial position to outsiders should have audited financial statements readily available. They demonstrate financial integrity and transparency.

Steps to Prepare for a Financial Statement Audit

If pursuing an independent audit, a company should take these steps to prepare:

• Organize financial records including ledgers, journals, bank statements and invoices.

• Review internal controls and accounting procedures. Address any gaps.

• Perform a self-audit to identify and correct errors.

• Draft the financial statements along with footnotes. Provide relevant supporting schedules.

• Gather documentation for all key accounts like receivables, payables, and accruals.

• Inform management they will need to provide written representations to auditors regarding financial statement accuracy.

• Allow ample time in the schedule for the auditors to complete their fieldwork and analysis.

Advanced preparation leads to a more efficient and effective audit engagement.

Maintain Credibility with Regular Audited Financial Statements

Audited financial statements provide critical validation of a company’s financial standing. They enhance transparency, inspire trust, and demonstrate financial competence to investors, lenders and partners. While audits require an investment of time and money, they deliver immense value for private companies seeking funding and growth. Maintaining up-to-date audited financials is a best practice for establishing credibility and securing capital to reach business goals.