Public companies are obligated by law to ensure that their financial statements are audited by a registered CPA. The purpose of the independent audit is to provide assurance that the management has presented financial statements that are free from material error. Also, hiring an independent and qualified CPA provides assurance to banks, suppliers and potential buyers 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 Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). The following are the main types of audited financial statements:
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. Towards the last line, the report reveals the net profit or loss for the period. The earnings per share figure may be included where the financial statements are issued by a public company. The auditor verifies the accuracy of these transactions by crosschecking the cash book and individual books of accounts.
The balance sheet reports the financial position of the company at the end of the fiscal year. It reveals the value of assets, liabilities, and equity of a company. The items in the assets and liabilities columns are presented in order of liquidity, such that the most liquid items are reported first. The auditor may verify the existence of these assets and liabilities, and the accuracy of the figures presented.
The cash flow statement may also be included in the audited financial statements. The statement reveals the cash inflows and outflows during the fiscal year. It provides an insight into the company’s ability to meet the short-term obligations and continue operating into the foreseeable future. The auditor may verify the entries in the cash flow statement against the bank statement and also the accuracy of the footnotes.
An auditor issues an audit opinion letter after completing the audit process, and it is included in the audited financial statements. In this letter, the auditor reveals the financial statements reviewed and the audit method used. If indeed there were no material errors in the financial statements, the auditor will give an audit opinion that the financial statements represent a true and fair view of the company’s performance and position.