Understanding Audited Financial Statements

Understanding Audited Financial Statements

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Audit & Assurance

When you seek funding from investors or lenders, they want their money to be safe to invest in the opportunities you bring. Therefore, they are expecting you to prepare the financial statements when you are going to meet them. If the potential investors you are hoping to sell your company to, still seem to be uncertain about your company’s finances, this may simply be because you have not prepared your audited financial statements yet. So, keep reading to find out what an audited financial statement and an unaudited financial statement are and how they are different.

What Do Audited Financial Statements Mean?

Any financial statement that was audited by a certified public accountant (CPA) is an audited financial statement. When a CPA verifies a financial statement, they make sure it has no material misstatement like general accounting principles and auditing standards. On the lack of such a CPA verification, investors and lenders cannot be confident that the statement presented by you is acceptable.

Different Kinds of Audited Financial Statements

Four primary types of financial statements have an auditing significance. 

  1.  Balance sheet: A balance sheet represents the overall value of the assets in your business combined with ownership equity and debts. It is considered a reflection of the financial health of your business. 
  2. Cash flow statement: A cash flow statement should indicate the total amount of cash at hand and cash equivalents that are available in the accounts of your business. Among the cash equivalents are overdrafts, bank deposits, assets that can be converted into cash, and other short-term asset investments. For this case, cash has the meaning of both the actual cash that you have in your hand and the money which are stored in the demand deposits.
  3. Income statement: The income statement, the same as the profit and loss statement, is a report on your business’s revenue after the expenses and losses were deducted. While a balance sheet is a picture of your business’s performance on that particular date, the income statement reflects that performance throughout an extended duration. It normally involves metrics like gross sales, net profits, and operating revenue as well as operating expenses, cost of goods sold, taxes, and promotional expenses.
  4. Statement of shareholder equity: In a typical balance sheet, both the shareholders’ equity and the statement of shareholders’ equity can be calculated as a separate document. It states all the changes you have made to the value of the company during the accounting period to the shareholders. The increasing equity level reflects good business, while the decreasing equity may mean the opposite.

What Are The Steps Of The Audited Financial Statement?

These are the typical steps that a CPA takes when auditing a financial statement.

  1. Research on an industry and assessing its associated risks.. For a proper audit result, the CPA needs to be aware of not just your business, but also your industry and competitors. With this knowledge, they would be able to notice the risks that might distort your financial statement’s accuracy.
  2. Testing internal control. The CPA will audit the internal controls of your company to determine the procedures for employee authorizations, delegation of duties, and capital asset management of your organization. Based on the analysis of these workflows, the CPA will write control procedures that test the adequacy of the processes. A comprehensive standard of procedures could mandate sophisticated auditing, and a deficient standard of procedures may demand additional financial reports.
  3. Verification of statements. Eventually, after two steps, the CPA will audit the financial statement, making sure that every single detail is adjusted to match the current situation. For instance, your CPA could be inquiring from companies with whom you have an unpaid invoice that needs to be verified to establish the right amount you owe. After you go through this step, your CPA will now be in a position to write a letter of opinion, which will be discussed below.

What Does An Audited Financial Statement Include?

The following details are included in an audited financial statement. 

  • CPA verification. Sometimes, even if you very carefully note down every single cash flow of your company, you may still make some errors. However, with the help of a CPA for auditing financial statements, the more improvements and steps you make, the closer you move to an error-free and more accurate outcome.
  • On-site inspection. For an audited document of financial statements, a CPA will focus on finding the root of the problem and will make sure everything is correct, but sometimes, there are situations that it’s not enough. To do this inspection, the CPA not only will be going through the final figures corresponding to your inventory but also actually carry out a physical stock counting personally to detect any gaps in stock taking.
  • Internal control inspection. In the case that your team has a group of employees who are responsible for your company’s spending, especially if these tasks are done without any supervision (or little checking from other co-workers) or proper documentation, then your CPA will inspect the performance of your employees and/or follow up on the documentation of such transactions. It is to protect the fraud because when there is very little everyday oversight, there is always a chance that you’re employees might be fudging your books or committing other kinds of fraud.

Opinion Letter

To summarize,  your accountant will issue an opinion letter based on their perception of your financial statements as an expert audit practitioner. There are four types of CPA financial statement opinions. 

  • Unmodified opinion: The opinion under discussion also referred to as “an unqualified opinion” ensures that you have maintained acceptable standard accounting practices and accurate bookkeeping.
  • Qualified opinion: Receiving this opinion would mean your CPA thinks that your financial statement preparation, accounting, and/or bookkeeping are proficient but just have some small gaps. The CPA will explain your case in detail, including the analytic problems and the solutions. When you correct your mistakes you can present them to the people, without any modification.
  • Adverse opinion: The view shows that financial statements cannot be relied on no matter how small and relatively insignificant the errors might be, they still have a significant risk to the reliability of the statements. Any investor, lender, or financial supporter must not be influenced by the financial statements. Your CPA will also clarify the best way of dealing with issues and will allow you to return for an unmodified opinion.
  • Disclaimer of opinion: That is not an opinion but rather a decline of thinking. It means that the documents were absent, and needed for a more detailed audit or an audit notification to give to your CPA.

Who Should Prepare For Audited Financial Statements?

Any business that provides its traits to shareholders or investors and lenders should keep audited financial statements. Almost all the funds/potential donors of your organization prefer to see audited accounts instead of unaudited ones to make sure there are no errors since the unaudited ones can have more errors. 

On the other hand, if your company is a publicly traded corporation, then you will need to make ordered financial statements annually. Audited financial statements are one of the requirements that must be complied with by all publicly traded companies before they can be listed. However, this does not imply that as a small business owner, you can never create unaudited statements if they are needed to assess your finances regularly.

What Is The Difference Between Audited And Unaudited Financial Statements?

Firstly, if you look at the audited and unaudited financial statements you will see the following differences. 

  • Creation: Any accountant without much experience can also declare an unaudited financial statement. Although only a CPA can render financial statements. 
  • Trust: When you provide an unaudited financial statement, the person reviewing your statement does not have the full trust that whatever the statement shows is true. The audited financial statement implies that this financial document has been reviewed by a competent and independent auditor who ensures its truth and accuracy. 
  • Time: We could see an unaudited financial statement setting up at a relatively short time and with the ease of execution; Your accountant is just a person who juggles all your financial statistics together in one document. The audited financial statements are typically completed in a few weeks or months.
  • Cost: In terms of cost, unaudited financial statements are cheaper than audited financial statements. Because either you hire a member of your in-house team or you hire someone who is a third-party accountant, you will have a cost advantage over a CPA.
  • Legitimacy: To get additional financial support, you’ll have to prepare audited financial statements. Unaudited financial statements supposedly do not guarantee their accuracy therefore, most investors consider this as untrustworthy.

This contrast suggests that everything the CPAs are doing for the company is what they call audited financial statements.

What Is The Difference Between The Audited Statement And The Other Types Of Accounting Reports?

The first thing that we all think of when we see the word “audit” is IRS. That is because audits are usually linked to the IRS to check on possible tax filing mistakes from the taxpayers. You might think of audits as a penalty, but it’s not true — they can be not only beneficial but paramount for your financial statements. So, let’s compare the audited report and the other types of accounting reports to understand better the difference. 

  • Compiled reports: A compilation statement, which is an accountant’s most basic task, includes no more than just the preparation of a financial statement. This report is called a “compiled report” because it is generated by compiling the financial records into an accepted financial statement format. An accountant compiling this report will not say anything about the accuracy of the data in the records used. Meaning, the information is unverified and unaudited. 
  • Reviewed reports: The process of reviewing may involve more prevention than compiling. In these cases, your account will go through a very small amount of analytical practices as well and the communication with your management will be limited. Your accountant will identify areas on your financial reports that require modifications. Your accountant is only responsible for testing that the company uses Generally Accepted Accounting Principles (GAAP), and they are not responsible for validation of the company standards.

Compared to other forms of reviewed and compiled reports, the audited report involves a complete and detailed verification of all items that appear on the financial statement. This implies simulating internal protocol testing to ensure the way money moves around in your company is what your report says. An audit indicates that your financial statements have been reported correctly.

How FastLane Group Can Help?

The process of preparing financial statements includes some vital data required to assess the company’s financial situation. Business owners may find it very difficult to keep the financial statements in good order and balanced as well as to stay in control of all financial operations. 

The accounting and auditing service from FastLane continues to be one of the best services in maintaining the accounts of clients and preparing unaudited financial statements. Professional accountants within FastLane can take care of your regular bookkeeping and financial statements with up-to-date implications so that you can focus on business growth. Get in touch right away with the FastLane expert who will tailor their plan for your needs!