What Is an Audited Financial Statement? (And What To Include)
Companies may use a financial review process, such as an audit, to ensure their documents contain the correct information. External stakeholders may request a business to audit their financial statements so they can feel confident that the company's reports are accurate. Understanding what these forms are and what companies use them for can help a business determine whether they may benefit from having their financial certificates audited.
In this article, we review what an audited financial statement is, discuss what to include in these documents, identify who prepares them, list the different types of statements and highlight how they differ from other reports.
What is an audited financial statement?
An audited financial statement is a company's document that a registered certified public accountant (CPA) has reviewed and determined is free from error. Companies may ask an external auditor to review their financial statements to ensure the information they contain is correct and to validate the business's financial credibility. Stakeholders and decision-makers, such as investors, may require audited financial statements from a company to ensure they provide a reliable representation of the organization's finances, such as expenses and profits.
Related: The 4 Types of Auditing Reports
What to include in an audited financial statement
The primary purpose of auditing financial statements is to ensure that the documents don't contain mistakes or inaccurate details, so it's important to include the all necessary elements during an audit, such as:
On-site inventory inspection: While CPAs typically inspect documents closely when auditing a financial statement, they may also perform an on-site inventory inspection to verify the details listed in the form. This allows them to ensure that stock counts match the details included on a financial statement and helps you notice any calculation or recording errors.
Verification from a CPA: While internal leaders or financial professionals may track and record a company's assets, liabilities and cash flow, performing a financial statement audit allows a CPA to verify internal documents and ensure they're accurate. This is important when presenting information to external stakeholders and potential investors.
Internal financial employee review: For large companies with several employees documenting and tracking the business's financial information, auditing statements can ensure that all professionals record these details accurately. Although it's unlikely, a CPA can also help an organization identify employees that consistently track information incorrectly.
Who prepares audited financial statements?
Companies prepare financial statements to present to CPAs for assessment. These professionals then perform an audit and review the forms' details and present them as audited financial statements. An organization may prepare a financial document for auditing because they want to ensure that their understanding of the company's financial performance and position is correct. They may also use audited financial statements to verify details for an external decision-maker, such as an investor. Federal regulatory bodies also require any publicly traded companies to file audited statements, so shareholders can stay informed about the organization's financial status.
Types of audited financial statements
A CPA uses a financial audit to review a company's financial statements and ensure that they're accurate and error-free. Here are the primary types of audited financial statements:
Cash flow statement
A cash flow statement is a document that a company uses to list the outflow and inflow of cash to and from the business. It can show investors and other external stakeholders than an organization is capable of meeting short-term obligations, such as operational costs and fees, and can continue to function and acquire profit in the future. A CPA may audit this document by ensuring the footnotes are correct and confirming the cash flow entry values by comparing them to bank statements.
Companies prepare income statements to highlight their performance over a fiscal year, including the expenses the business incurred and the revenue it generated. On the last line of the report, businesses include their overall net profit or net loss. If a publicly traded company is preparing the statement, they may also include the earnings per share (EPS). During the auditing process, a CPA may review the company's cash book and individual books of accounts to verify that the information on the income sheet is correct.
A balance sheet is a document that organizations use to report their financial position for a particular period of time, such as a fiscal quarter or year. On this sheet, a business represents its assets and liabilities in order of liquidity. The liquidity of an asset is determined by how easily its wonder can convert it into cash. A CPA may evaluate a company's balance sheet to ensure they accurately represented their assets and liabilities and that the document is error free.
Statement of shareholder equity
Although companies can include a statement of shareholder equity on a balance sheet, they can also add it as an individual financial statement as well. Shareholders can review this document to assess the company's value and analyze changes that occurred over a specific fiscal period. Shareholders may benefit from increasing equity, whereas they may decide to sell their shares of a company if their equity is decreasing.
How do audited financial statements differ from other accounting reports?
Audited financial statements, or audited reports, differ from other accounting reports such as reviewed reports and compiled reports. When a CPA performs an audit of one or more financial statements, they assess every item on the document to ensure accuracy and perform protocol testing to analyze whether finances move within the business in the same way as the organization lists on the document.
Alternatively, an entry level accountant who isn't a CPA can create a compiled report, which is the same as a financial statement. Professionals develop these reports by compiling information from internal financial records. These reports lack the verification that audited reports provide. Companies can also create reviewed reports, which include a few analytical procedures and verify that the organization adheres to the generally accepted accounting principles (GAAP). While reviewed reports offer more verification than a compiled report, it doesn't include protocol testing.
Audited vs. unaudited financial statements
There are a few primary differences between audited and unaudited financial statements, including:
Cost to create: While audited financial statements can be useful and may be required by federal regulatory bodies, they cost more than unaudited financial statements, because an organization hires a CPA to perform the review.
Accuracy and validation: When an organization wants to apply for business funding and present information to shareholders, they may rely on audited financial statements because of their accuracy and CPA validation. Instead, unaudited forms may contain errors or unverified details.
Time required: Audited documents take more time to produce than unaudited forms because of the detailed review processes and protocol testing involved. Instead, accountants can create unaudited statements by compiling information from financial records.
Expertise: Professionals require different levels of expertise to create audited and unaudited statements. While any accountant can create an unaudited financial statement, CPAs require additional training and expertise to produce audited documents.
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