What Is an Audited Financial Statement?

What is an audited financial statement?

An audited financial statement is an independent, objective evaluation of a company’s financial records by a certified public accountant (CPA). When a CPA firm audits financial statements, it ensures the business adheres to Generally Accepted Accounting Principles (GAAP) and professional auditing standards.

Without CPA verification, investors and lenders may question the accuracy of your financial reports. Such trepidation can reduce their confidence in your company’s financial stability.

Darian Shimy recommended stringent preparation for this process, including using one of the best accounting software platforms to streamline recordkeeping. “I also suggest engaging a qualified CPA or auditing firm early in the process, as their guidance can prevent issues and simplify the audit,” Shimy, CEO and founder of FutureFund, added.

What is included in an audited financial statement?

An audited financial statement includes a detailed examination of four key financial reports: a balance sheet, cash flow statement, income statement and statement of changes in equity. It also includes an opinion letter from the CPA assessing their reliability.

1. Balance sheet: A balance sheet provides a snapshot of your business assets, shareholder equity, liabilities and debts at a specific point in time.
2. Cash flow statement: A cash flow statement tracks cash and cash equivalents moving in and out of your company’s accounts. Cash equivalents include bank deposits, cash-convertible assets and short-term investments. For this type of statement, cash includes both cash available on hand and money stored in demand deposits. Cash equivalents must have maturities of 90 days or less.
3. Income statement: An income statement, also known as a profit and loss statement, details your company’s revenue, expenses, and net gain or loss. A balance sheet is a snapshot of your company’s performance at a specific moment in time, but an income statement captures that performance over a period, such as a fiscal year. It includes metrics such as gross profits, net earnings, revenue, expenses, cost of goods sold, taxes and pretax earnings.
4. Statement of changes in equity: While often included as a portion of the balance sheet, the statement of shareholder equity can also be prepared separately. It details all changes to your company’s value to shareholders or owners during an accounting period, including net income and contributions or withdrawals.
5. Opinion letter: A CPA firm issues an opinion letter summarizing its findings and assessing the fairness and accuracy of the financial statements. There are four possible CPA opinions:

• Unqualified (or unmodified) opinion: Your financial statements are accurate and comply with standard accounting practices. This is the highest opinion you can receive.
• Qualified (or modified) opinion: Your CPA found minor issues in your financial statements but believes they are still mostly reliable. The letter will outline the necessary corrections that will help you obtain an unqualified opinion.
• Adverse opinion: Your financial statements contain significant inaccuracies or GAAP violations, so investors and lenders should not rely on them. Your CPA will provide recommendations to correct the issues.
• Disclaimer of opinion: Your CPA was unable to complete the audit due to missing information, lack of access or insufficient time. This result means no opinion can be given.

The highest opinion for a publicly traded company is called an “unqualified opinion.” For a private company, it is referred to as an “unmodified opinion.”

What are the stages of an audited financial statement?

An audit of financial statements typically follows four key stages:

1. Industry research and risk assessment: The auditing CPA begins by gaining a thorough understanding of your business, industry and competitors. This knowledge helps them identify potential risks that could affect the accuracy of your financial statements.
2. Internal control testing: The CPA will test your company’s internal controls to understand key processes, including employee authorizations, delegation of responsibilities and asset protection. Next, the CPA conducts control procedures. If your business has strong internal controls, a more complex audit may be required. If your controls are weak, the CPA may need to conduct additional financial assessments.
3. Thorough statement verification: The CPA will perform detailed testing of representative financial elements. For example, let’s say the CPA is verifying your accounts payable. They may reach out to vendors to confirm invoice amounts and cross-check transaction records to ensure accuracy.
4. Rendering an opinion: After completing the audit, the CPA will issue an opinion on whether your financial statements represent a true and fair view of the company’s financial position. As mentioned earlier, the best possible outcome is an unqualified opinion (full approval), while the worst is an adverse opinion (financial misstatements detected).

Does my business need audited financial statements?

Crystal Stranger, CEO of OpticTax.com, noted that most businesses do not need audited financial statements, especially since audits can cost thousands of dollars. Typically, only companies publicly financed and regulated by the SEC are required to have audited financials.

“However, in certain situations, a set of audited financials can be helpful, such as when seeking a bank loan, during a partnership dissolution, or when executing equity exchanges from financial instruments such as options or SAFE notes,” Stranger explained.

Audited financial statements are particularly valuable when applying for a business loan or seeking investor funding. These stakeholders want to ensure they are making a sound financial decision.

Shimy, whose platform helps K-12 schools streamline fundraising and volunteering, emphasized that growing businesses may find value in audited financial statements. “At FutureFund, having clear, audited financials has been key to earning the trust of school districts and demonstrating accountability,” Shimy explained.

What is the difference between audited and unaudited financial statements?

When comparing audited and unaudited financial statements, you’ll notice the following key differences:

• Creation: Any bookkeeper or accountant can create an unaudited financial statement, but only a CPA can create an audited financial statement.
• Trust: When you present an unaudited financial statement, the person reviewing your statement cannot entirely trust its accuracy. In contrast, an audited financial statement is, by definition, thoroughly and professionally reviewed for accuracy.
• Time: Unaudited financial statements are faster to generate. Your accountant compiles all your financial information into a single document. In contrast, audited financial statements often take weeks or even months to complete.
• Cost: Audited financial statements require CPA oversight and verification, making them much more costly to produce than unaudited ones.

How does an audited report differ from other types of accounting reports?

Audited reports differ from other formal accounting reports, such as compiled reports and reviewed reports. Here’s how they compare:

• Compiled reports: A compiled report, also called a compilation report, is created by organizing financial records into a standard statement format. While this type of report can be helpful for internal reviews, it’s not sufficient for external stakeholders.
• Reviewed reports: A reviewed report undergoes a bit more scrutiny than a compiled report but less than an audit. For these reports, an accountant performs limited analytical procedures and submits a small number of inquiries to company management. The accountant verifies GAAP compliance but does not test internal controls.

In contrast to compiled and reviewed reports, audited reports involve a thorough review of items on a financial statement. They also entail internal protocol testing to ensure financial transactions are accurately recorded.

An audit provides the highest level of assurance. Such a designation means that, in the auditor’s opinion, your financial statements are fully accurate and present a true picture of the company’s financial position and performance.

Max Freedman contributed to this article.