What Is an Audited Financial Statement?

What is an audited financial statement?

An audited financial statement is any financial statement that a certified public accountant (CPA) has audited. When a CPA audits a financial statement, they will ensure the statement adheres to general accounting principles and auditing standards. Without this CPA verification, investors and lenders may not be confident the statement you’re presenting is accurate.

Types of audited financial statements

There are four primary types of financial statements that may merit auditing.

1. Balance sheet: A balance sheet details your business’s total assets, shareholder equity and debts at a given point in time. It’s often thought of as a snapshot of your company’s financial performance. [Read related article: 4 Ways to Boost Your Balance Sheet]
   
2. Cash flow statement: A cash flow statement details the amounts of cash and cash equivalents that move in and out of your company’s bank accounts. Cash equivalents include overdrafts, 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.
3. Income statement: An income statement, also known as a profit and loss statement, details your company’s revenue after all expenses and losses. Whereas a balance sheet is a snapshot of your company’s performance at that moment in time, an income statement captures that performance over an extended period. It usually includes metrics such as gross profits, net earnings, revenue, expenses, cost of goods sold, taxes and pretax earnings.
4. Statement of shareholder equity: While often included as a portion of the balance sheet, the statement of shareholder equity can be prepared separately as well. It details all changes to your company’s value to shareholders during an accounting period. Increasing equity indicates good business practices, while decreasing equity may indicate the opposite.

What are the stages of an audited financial statement?

A CPA auditing a financial statement usually moves through the following three stages.

1. Industry research and risk assessment. To do a proper audit, the CPA should learn about not just your business but its industry and competitors. With this knowledge, they may be able to better identify risks that could affect your financial statement’s accuracy.
2. Internal control testing. Your CPA will test your company’s internal controls to understand your organization’s processes for employee authorizations, delegation of responsibilities and asset protection. After identifying these workflows, the CPA will conduct control procedures to verify their fortitude. A strong set of procedures may merit more complex auditing, while a weak set of procedures may require extra financial assessments.
3. Thorough statement verification. Following the first two stages, your CPA will verify each and every item on the financial statement. For example, if the CPA is verifying your accounts payable, they may reach out to companies with whom you have uncompleted invoices to verify the amount you owe. After this stage, your CPA will be ready to offer an opinion letter, which we’ll discuss more below.

What is included in an audited financial statement?

An audited financial statement includes the following information.

• CPA verification. Even if you meticulously track all your company’s spending and earnings, you might make errors. When you hire a CPA to audit your financial statements, you minimize these errors and move your statement closer to complete accuracy.
• On-site inspection. For an audited financial statement, a CPA will go over your financials with a fine-tooth comb, but sometimes, that’s not all. If parts of your financial statements include reports on your inventory, your CPA may also personally inspect your inventory to ensure no gaps in stock counts.
• Internal control inspection. If your team includes employees who monitor your company’s spending — especially if these employees have little to no supervision or double-checking from other staff members — your CPA may inspect their work. That’s because, with so little everyday oversight, there’s always a chance (though maybe a tiny one) that these employees could be fudging your books or otherwise committing fraud.

Opinion letter

To summarize the above information, your CPA will provide an opinion letter detailing their perspective on your financial statements. There are four types of CPA financial statement opinions.

• Unmodified opinion: Also known as an “unqualified opinion,” this opinion from a CPA means you prepared your financial statements accurately using standard, acceptable bookkeeping and accounting practices.
• Qualified opinion: If you receive this opinion, your CPA thinks your financial statement preparation, accounting and/or bookkeeping have a small number of gaps. Your CPA will detail these problems and how you can fix them. Once you rectify your errors, you can seek an unmodified opinion.
• Adverse opinion: This opinion signifies your financial statements are inaccurate, with more than just a small, relatively insignificant number of gaps. It means investors, lenders and other funders should not trust the information in your financial statements. Here, too, your CPA will explain the best route for fixing the issues and allow you to return for an unmodified opinion.
• Disclaimer of opinion: This result is not an opinion but a lack of one. It signifies that you haven’t given your CPA the access, information or time needed for a complete audit.

Who should prepare audited financial statements?

Any business that presents its financials to investors or lenders should prepare audited financial statements. The vast majority of potential funders for your company will request audited financial statements instead of unaudited ones, since the latter leaves far more room for error.

Additionally, if your company is publicly traded, you’ll need to prepare annual audited financial statements. While federal regulatory bodies mandate that publicly traded companies file audited statements, you can regularly create unaudited ones throughout the year if they help you assess your finances.

What is the difference between audited and unaudited financial statements?

When you compare audited and unaudited financial statements, you’ll notice the following key differences.

• Creation: Any accountant can create an unaudited financial statement. 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 that it is accurate. An audited financial statement is, by definition, thoroughly and professionally reviewed, eliminating any doubts about its accuracy.
• Time: An unaudited financial statement is fairly quick and simple to generate. Your accountant simply compiles all your financial information into one document. An audited financial statement, on the other hand, will likely take weeks or even months to complete.
• Cost: Unaudited financial statements cost less money to generate than audited financial statements. That’s because whether your in-house accounting team prepares them or you hire a third-party accountant, you won’t pay as much as you would to go through a CPA.
• Legitimacy: When applying for additional business funding, you’ll likely need to present audited financial statements. Since unaudited financial statements don’t include a guarantee of accuracy, lenders and investors often do not consider them legitimate.

From these differences, you can see that the fundamental characteristic of audited financial statements is the involvement of CPAs. To learn more about how CPAs differ from traditional accountants and determine how you can hire either for your company, read our article: How to Hire the Right Accountant for Your Business.

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

When you think of the word “audit,” the IRS might be the first thing to come to mind. That’s because audits are often associated with the IRS investigating taxpayers for possible tax-filing inaccuracies. You might think of audits as a punishment, but they’re not — they can actually be beneficial, if not paramount, for your financial statements. To understand why, compare an audited report to two other types of accounting reports.

• Compiled reports: Any accountant can prepare a compiled report, which is nothing more than a basic financial statement. It’s called a “compiled report” because your accountant generates it by compiling your financial records into a widely accepted financial statement format. However, in compiling this report, your accountant does not check whether the information you’ve given them is accurate and will say so in the report. In other words, the information is unaudited.
• Reviewed reports: A reviewed report undergoes slightly more scrutiny than a compiled report. For these reports, your accountant will employ limited analytical procedures and submit a small number of inquiries to your company’s management. Through this work, your accountant will determine whether your financial statements require substantial modifications. Your accountant will also verify that your company uses generally accepted accounting principles (GAAP), but they will not test your protocols.

In contrast to compiled and reviewed reports, an audited report involves a thorough review of each and every item on a financial statement. It also entails internal protocol testing to ensure money moves about your company in a way that your reports accurately reflect. An audit is proof your financial statements are fully accurate.

Skye Schooley contributed to this article.