Public companies are obligated by law to ensure that their financial statements are audited by a registered certified public accountant (CPA). The purpose of the independent audit is to provide assurance that company management has presented financial statements that are free from material error.
Additionally, hiring an independent and qualified CPA provides assurance to banks, suppliers, and potential investors that the business is financially sound and creditworthy. Audited financial statements are needed to provide information to decision-makers.
During a financial audit, a CPA confirms that the financial statements do not contain material errors. In case there are substantial errors, the CPA recommends corrective measures that comply with the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).
The following are the main types of audited financial statements:
1. Income Statement
An income statement shows the performance of the company during a fiscal year. The statement reports the revenue earned and expenses incurred during the period. On the last line, the report reveals the net profit or loss for the period. (This fact is actually the origin of the term, “bottom line”, as the bottom line on an income statement shows a company’s profit/loss for the year.)
The earnings per share (EPS) figure may be included when the financial statements are issued by a publicly traded company.
The auditor verifies the accuracy of transactions by cross-checking the cash book and individual books of accounts.
2. Balance Sheet
The balance sheet reports the financial position of the company at the end of the fiscal year (or at any other point in time a balance sheet is prepared; for example, companies are usually required to submit a balance sheet when applying for a loan). It reveals the value of assets, liabilities, and equity of a company.
The items in the assets and liabilities columns are typically presented in order of liquidity, with the most liquid items reported first. The auditor may verify the existence of assets and liabilities, and the accuracy of the figures presented.
3. Cash Flow Statement
The cash flow statement may also be included in the audited financial statements. The cash flow statement reveals the cash inflows and outflows during the fiscal year. It provides an insight into the company’s ability to meet its short-term obligations and continue operating in the foreseeable future. The auditor may verify the entries in the cash flow statement against the bank statement and also check the accuracy of the footnotes.
Audit Opinion Letter
An auditor issues an audit opinion letter after completing the audit process, and it is included with the audited financial statements. In this letter, the auditor reveals the financial statements reviewed and the audit method used. If there were no material errors in the financial statements, then the auditor will give an audit opinion that the financial statements represent a true and fair view of the company’s performance and position.
Below is an example of an audition opinion letter, to be used for educational purposes only.
Dear Board of Directors
We, the auditors, have audited the income statement, balance sheet, and cash flow statement of XYZ Company as of December 31, 2022.
We completed our audit according to the auditing standards set out by Generally Accepted Accounting Principles (GAAP) in the United States. Based on this audit, we have obtained reasonable assurance that the above noted financial statements are free of material misstatement.
As part of our audit, we examined and tested evidence supporting the figures contained in the financial statements. We also assessed the accounting principles and estimates used by the company in preparing their financial statements. This audit formed the basis of our opinion, stated below.
In our opinion, the financial statements of XYZ Company are represented in accordance with Generally Accepted Accounting Principles (GAAP) in the United States.
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