In the intricate world of financial reporting, it’s important to understand the difference between audited and unaudited financial statements in both how they should be used and who they should be presented to. Whether your financial statements are audited or unaudited plays a pivotal role in determining the trustworthiness associated with a company’s financial standing. While unaudited financial statements can be quick and inexpensive to prepare, audited financial statements have several benefits and are often required by law. In this blog, we’ll cover everything you need to know about audited and unaudited financial statements, delving into the processes, benefits, and scenarios where each holds significance.
What are Audited Financial Statements?
Audited financial statements serve as a seal of authenticity, bearing the professional scrutiny of a Chartered Professional Accountant (CPA). These statements encompass vital financial documents, including income statements, shareholder equity statements, cash flow statements, and balance sheets.
1. Income Statement:
An income statement, also known as a profit and loss statement, provides a summary of a company’s revenues, expenses, and profits over a specific period, usually a quarter or a year. The key components of an income statement include:
- Revenue: The total income generated from the sale of goods or services.
- Expenses: The costs incurred in the process of generating revenue, such as operating expenses, cost of goods sold (COGS), and other overhead costs.
- Net Income: The difference between revenue and expenses, representing the company’s profit or loss.
The income statement is a crucial tool for assessing a company’s profitability and operational efficiency.
2. Shareholder Equity Statement:
The shareholder equity statement, also known as the statement of changes in equity, outlines the changes in a company’s equity over a specific period. Equity represents the ownership interest in the company and is calculated as the difference between a company’s assets and liabilities. The key components of a shareholder equity statement include:
- Common Stock: The total value of shares issued by the company.
- Retained Earnings: The accumulated profits or losses retained by the company over time.
- Additional Paid-in Capital: Any capital received from investors that exceeds the par value of the stock.
- Treasury Stock: The company’s own stock that it has reacquired.
This statement provides insights into how the ownership of the company changes over time.
3. Cash Flow Statement:
The cash flow statement provides a detailed account of a company’s cash inflows and outflows over a specific period, categorizing these activities into three main sections:
- Operating Activities: Cash transactions related to the core business operations, such as receipts from customers and payments to suppliers.
- Investing Activities: Cash transactions related to the acquisition and disposal of long-term assets, such as property, equipment, and investments.
- Financing Activities: Cash transactions related to the company’s capital structure, including borrowing, repaying loans, issuing or repurchasing stock, and paying dividends.
The cash flow statement is vital for assessing a company’s liquidity and ability to meet its short-term obligations.
4. Balance Sheet:
A balance sheet provides a snapshot of a company’s financial position at a specific point in time. It presents the company’s assets, liabilities, and equity, following the accounting equation:
Assets=Liabilities+Equity
The key components include:
- Assets: The resources owned by the company, such as cash, accounts receivable, inventory, and property.
- Liabilities: The company’s obligations, including debts, accounts payable, and accrued expenses.
- Equity: The residual interest of the owners in the company’s assets after deducting liabilities.
The balance sheet is fundamental for understanding a company’s financial structure and its ability to meet long-term obligations.
The audit process adds a layer of credibility to these statements, ensuring they accurately depict the financial status of a company.
What is Auditing?
At its core, auditing is the meticulous examination of a company’s financial documents by a CPA. This process aims to verify the accuracy and transparency of the financial representations, offering stakeholders the assurance that the company’s financial standing is faithfully depicted.
Steps Involved in Auditing Financial Statements
If your financial statements are being audited, prepare for several steps. The CPA assigned to audit your financial statements will require a lot of your time and the ability to dig deep into your business’ financial status.
- Research and Planning: Before commencing the audit, the CPA conducts thorough research on the company and its industry. This phase includes reviewing previous audit statements and formulating a detailed plan.
- Fieldwork: The CPA assigned to the audit undertakes essential fieldwork. This involves control testing, assessing and verifying financial statements, and conducting interviews with relevant personnel.
- Drafting the Report: Following the fieldwork, the CPA compiles a comprehensive report detailing all findings. This report includes a list of the audited financial statements.
- Opinion Letter: One of the crucial outcomes of the audit is the issuance of an Opinion Letter. This letter categorizes the audit findings, ranging from an ‘Unmodified Opinion’ (your statements are true and fair), a ‘Qualified Opinion’ (there are some gaps but mostly true), ‘Adverse Opinion’ (your statements are inaccurate and need significant work to rectify the issues), or a ‘Disclaimer of Opinion’ (your CPA couldn’t complete the necessary work to form an opinion as they were not given access or enough time)
- Correction Plan: In cases where discrepancies are identified, the CPA collaborates with the company to create a plan rectifying any issues or mistakes.
- Utilization of Audited Statements: The verified and audited financial statements can be powerful tools for showcasing a company’s financial health and reliability. They provide stakeholders with the confidence that the projected revenue and financials are a true and fair representation.
What are Unaudited Financial Statements?
In contrast, unaudited financial statements lack the external validation provided by an independent CPA. While they offer a snapshot of a company’s financial status, they lack the comprehensive assurance that comes with an audit. Unaudited financial statements are quick to prepare and much less costly; however, they are not as trustworthy and often won’t stand up when asked to present financial statements to the CRA, investors, stakeholders, or lenders.
Benefits of Audited Financial Statements
There are several benefits to having your financial statements audited. Here are the primary things to consider when preparing your financial statements.
- Innate Trust: Audited financial statements carry an inherent trust factor, instilling confidence in stakeholders due to the rigorous examination by an independent CPA.
- Legitimacy: Financial lenders, investors, and stakeholders often require audited financial statements, as they provide a guarantee of accuracy and legitimacy.
- Peace of Mind: Businesses equipped with audited financial statements gain peace of mind, especially when facing government audits or scrutiny from other stakeholders.
Do You Need Audited Financial Statements?
Any business who is publicly traded or working with investors and financial lenders should have audited financial statements prepared. Public companies are required to have audited financial statements by law, but anyone working with external investors should also have their statements audited for the peace of mind of themselves and their stakeholders. If you are unsure that your financial statements are a proper representation of your company, have a CPA audit your financial statements to ensure that you’re starting off on the right footAny businesses engaged with investors, financial lenders, or the public. While public companies are mandated to undergo audits, any business collaborating with external investors benefits from the legitimacy and peace of mind that audited statements confer.
Gallo LLP Will Perform Your Financial Statement Audit
As your trusted financial partner, Gallo LLP stands ready to assist your business in navigating the complexities of audited financial reporting. Our team of experienced CPAs is dedicated to ensuring the integrity and accuracy of your financial reports. Whether you are a publicly traded company or working closely with external investors, Gallo LLP is committed to helping your business grow and thrive. Contact us today for a consultation tailored to your auditing needs.