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If A Financial Statement Has Been Audited, What Does It Mean?

Aug 25

In order to get a loan for your business, potential lenders may need to see your audited financial statements. Find out what this is and why it plays a role in getting a loan for your business. You came prepared to your pitch meeting with accurate financial records, as you know that lenders and investors want assurances that they won't lose money on the risks you present in exchange for firm financing. However, if the people you're presenting to still have questions about your company's finances, you may not have prepared an audited financial statement. The following text will explain what an audited financial statement is and how it differs from a statement that has not been audited.

 

The definition of an audited financial statement

An audited financial statement is one that has been reviewed and verified by a CPA. A Certified Public Accountant (CPA) will ensure that the audited financial statement is in accordance with generally accepted accounting principles and auditing standards. Lacking this CPA documentation may cause inventors and lenders to doubt your claims.

 

In comparison to other types of accounting reports, what makes an audited report special?

When you hear the word "audit," you may immediately think of the Internal Revenue Service (IRS). This is accurate since most people's mental image of an audit involves the Internal Revenue Service checking for problems in tax returns. Therefore, you may see audits as a kind of punishment, but they are really very beneficial, if not vital, to the accuracy of your financial accounts. See this in light of the following comparisons between an audited report and the other two common forms of accounting reports:

  • Informational reports that have been gathered Any CPA is capable of putting up a collected report, which is essentially a financial statement. An accountant prepares a compiled report when they organize their client's financial information into a standard financial statement format. But your accountant will note explicitly that they did not verify the accuracy of the data you provided them with before compiling the report.
  • Data has been analyzed. In general, a produced report receives less attention than a vetted report. In preparing these reports, your accountant will use limited analytical procedures and submit a manageable amount of queries to your company's management. As a consequence of this work, your accountant will be able to advise you whether any major adjustments need to be made to your financial accounts. Your accountant will also check that you are using generally accepted accounting standards, but won't verify the efficacy of your processes.
  • Audited reports An audited report must include a thorough review of all aspects of a financial statement. To ensure that money is transferred throughout your company as reported, you should also do internal protocol testing. An audit thereby ensures the accuracy of your financial accounts.

 

When it comes to putting up reliable financial reports, whose responsibility is it?

All companies that provide their financial data with potential investors or lenders should do so using audited financial accounts. Unaudited financial statements have a lot more room for mistake than certified ones, therefore most investors will only accept the latter.

If your business is going public, you will also need to generate audited financial statements each year. While federal authorities mandate audited financial statements for publicly traded companies, unaudited accounts may nevertheless be prepared on a regular basis if they help with financial analysis.

 

Finance

 

Audited financial statements

The four primary categories of financial reports that may need an audit are as follows:

  • Balance sheet entries. A balance sheet summarizes your company's assets, shareholder equity, and liabilities as of a certain date. It is often used as a snapshot of your company's health.
  • Bank statement or cash flow statement. A cash flow statement details the influx and outflow of cash and other liquid assets for your business.
  • Cash equivalents include things like overdrafts, bank deposits, cash-convertible assets, and short-term investments. Both on-hand cash and demand deposits are reported in this manner.
  • Report of earnings or profit and loss. When all expenses and losses have been accounted for, an organization's income statement (also called a profit and loss statement) will detail the remaining cash balance. While the balance sheet gives a glimpse of your company's performance, the income statement shows how well your business has done over time. Profits before interest, taxes, and amortization are often included as well as pre-tax earnings, gross profit, net earnings, sales, expenses, cost of goods sold, and taxes.
  • Profit and loss report to the stockholders. The statement of shareholder equity is often included in the balance sheet, although it may also be generated separately. It is a summary of the changes in your company's value throughout an accounting period. Increases in equity are indicative of sound corporate operations, whereas decreases may indicate unsound conduct.


When it comes to an audited financial statement, what are the several stages to look out for?

A CPA will normally go through these three steps while auditing a financial statement:

  • Scientific investigation and threat evaluation. In order to do a thorough audit, a CPA needs knowledge of your sector and your competitors in addition to your own company. If they have this knowledge, they may be better able to spot potential threats to the integrity of your financial accounts.
  • Checks for quality control on the inside. Your CPA will look at your company's internal controls to see how it manages things like employee approvals, delegating tasks, and safeguarding assets. Following the elucidation of these processes, your CPA will conduct control procedures to guarantee their continued viability. It's possible that a thorough audit will be required of a strong collection of processes, while a thorough review of the finances will be required of a poor set of procedures.
  • All claims must be checked. After the first two steps are done, your CPA will review the financial statement in detail, looking at every line item. When verifying accounts payable, your accountant may call any unpaid billees to make sure you owe the correct amount. Your CPA will then be able to provide an opinion letter, which we'll discuss in further depth at this point.


What information may be found in a set of audited financials?

An audited financial statement will typically contain the following details:

  • An independent CPA audit Even if you carefully record each dollar in and dollar out of your business, you might still make a mistake. Hiring a certified public accountant (CPA) to review your financial records increases the likelihood that you will find fewer errors and get closer to a state of perfect correctness.
  • Quick on-the-spot checks. Even after having a certified public accountant (CPA) look through your financials with a fine-tooth comb to create an audited financial statement, it may not be possible to draw any firm-wide conclusions. If inventory information is included in your financial accounts, your CPA may do an in-depth analysis to ensure there are no discrepancies in stock counts.
  • Examining the internal mechanisms is being done. When there is little to no supervision or double-checking from other team members, your CPA may assess the work of employees who manage your company's expenditures. That's because there's always a chance (although a tiny one) that these people will try to cheat you out of money by altering your records.


Recommendation letter

To sum up, your CPA will write a letter expressing their professional judgment on your financial accounts. There are typically four perspectives used by CPAs when analyzing financial statements:

  • Nothing has changed in my mind. To have your financial statements issued with an unqualified opinion by a certified public accountant indicates that they were prepared with the utmost accuracy and that you followed all of the appropriate procedures for maintaining financial records.
  • This is a well-informed point of view. If your CPA gives you this view, it means they think there are some problems with the way you handled your financial statement creation, accounting, and/or bookkeeping. You can get an unmodified opinion after your CPA walks you through the problems and shows you how to repair them.
  • An unfavorable perspective or view. As far as our evaluation is concerned, your financial statements include more than a handful of insignificant errors. If this happens, it sends a message to potential investors, lenders, and other funders that they shouldn't put their faith in your financial accounts. Your CPA will also let you know what other choices you have and provide you the opportunity of coming back for an unchanged opinion.
  • To be clear, this is simply my own perspective. What we have here is not an opinion but rather the absence of one. If your CPA is unable to complete an audit because of a lack of information, access, or time, it is likely that your audit was not comprehensive.


How do audited financial accounts vary from unaudited financial statements?

When comparing audited and unaudited financial accounts, you will mostly notice the following differences:

  • Creation. Any CPA is free to compile an unaudited financial statement. Only a certified public accountant (CPA) may create an audited financial statement.
    Trust. An unaudited financial statement reduces the examiner's trust in the numbers presented. Any doubts about the accuracy of an audited financial statement have been thoroughly and adequately addressed.
  • Time. It is simple to put up an unaudited financial report. Your accountant's only job is to compile all of your financial records into one place. On the other hand, it will likely take a few weeks to a few months to complete an audited financial statement.
  • Cost. Unaudited financial statements may be produced at a lower cost than audited ones. For one thing, whether your own accounting team prepares them or you hire a third-party accountant, you won't have to spend as much as you would on a certified public accountant.
  • Legitimacy. When seeking more finance for your firm, you will likely be required to provide audited financial statements. Unaudited financial statements are often disregarded by lenders and investors due to the lack of reliability they provide.