Contributing Writer at business.com Reprint from https://www.business.com/articles/audited-financial-statement/
When you apply for business funding, lenders and investors want to be sure they won’t lose money on the opportunities you present. That’s why you must bring detailed financial statements to your pitch meeting. If, however, the people you’re presenting to feel still uncertain about your company’s finances, that might be because you haven’t prepared an audited financial statement. Read on to learn what an audited financial statement is and how it differs from an unaudited one.
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 ensure it adheres to general accounting principles and auditing standards. Without this CPA verification, investors and lenders may not be confident your statement is accurate.
Types of audited financial statements
Four primary types of financial statements may merit auditing.
- Balance Sheet: A balance sheet details your business’s total assets, shareholder equity, and debts at a given time. It’s often considered a snapshot of your company’s financial performance. [Read related article: 4 Ways to Boost Your Balance Sheet]
- 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 cash available on hand and money stored in demand deposits.
- Income statement: An income statement, or 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, an income statement captures that performance over an extended period. It usually includes gross profits, net earnings, revenue, expenses, cost of goods sold, taxes, and pretax earnings.
- Statement of shareholder 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 during an accounting period. Increasing equity indicates good business practices, while decreasing equity may indicate the opposite.
FYI
Do you want your financial statement to pass an audit with flying colors? Avoid making these small business accounting mistakes.
What are the stages of an audited financial statement?
A CPA auditing a financial statement usually moves through the following three stages.
- Industry research and risk assessment.“To conduct a thorough audit,…” the CPA should learn about your business, industry, and competitors. With this knowledge, they may be able to identify better risks that could affect your financial statement’s accuracy.
- 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 robust set of procedures may merit more complex auditing, while a weak set may require extra financial assessments.
- Thorough statement verification. Following the first two stages, your CPA will verify every item on the financial statement. For example, if the CPA verifies your accounts payable, they may contact companies with 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 below.
What is included in an audited financial statement?
An audited financial statement includes the following information.
- CPA verification. You might make errors even if you meticulously track all your company’s spending and earnings. 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 committing fraud.
Did You Know?
Having a CPA conduct an audit on your organization is just one way to catch or prevent employee accounting fraud.