Presenting accurate financial statements is the backbone of any successful company. For one, doing your due diligence is your duty to investors and stakeholders, but just as important is following the laws and regulations that govern financial reporting. That is especially true for public companies, as federal bodies such as the Securities Exchange Commission demand accurate yearly reports down to the most granular details.
So how can companies convince regulating bodies, shareholders, and employees that the reports are trustworthy? Companies guarantee their financial statements are accurate by undergoing a financial statement audit. It’s a fairly common practice carried out by small and large companies alike. Furthermore, public companies are required by law to perform annual financial statement audits. Below, we’ll tell you everything you need to know about financial statement audits, including what it means, how it’s done, and what you can expect.
Fully Accountable is dedicated to informing you on all the latest financial regulations and how to prepare for them. With our outsourced accounting services, you won’t have to worry about getting taken by surprise by ever-changing laws and regulations, leaving you more time to focus on running your business.
Financial Statement Audit Definition
A financial statement audit is a thorough inquiry of a company’s financial statements done by an auditor to verify that the information is valid. While financial statements are typically made in-house by the accounting department, a financial auditor’s job is to certify that the information is accurate.
Financial Statement Audits are Routine for Public Companies
Types of financial statements that are commonly audited include:
- Balance sheets — The balance sheet is a financial statement that accurately records all assets, liabilities, and stockholders’ equity. This may include a company’s total cash on hand, properties, equipment, debts, and other assets or liabilities. The purpose of a balance sheet is to ascertain the company’s financial standing. Alternatively, a statement of financial position may be used interchangeably with the term balance sheet.
- Income statements — A company’s income statement delineates four aspects of a business within the fiscal year: revenue, gains, expenses, and losses. By figuring out these four numbers, you get a clear picture of a company’s net income, meaning the money the company gets to keep after everything else has been settled.
- Cash flow statements — Cash flow statements are more direct, stating how much money is coming in and going out. There are several ways to calculate cash flow, though you can calculate cash flow with the help of the balance sheet and income statement.
Audits are Done by External Accountants
It would be more convenient and affordable if a company used one of its accountants to perform the audit, but that’s not possible because that’s a serious conflict of interest. Since it’s fairly reasonable that an in-house accountant would overlook certain things to keep their job, there’s no expectation that anyone would take the financial statement audit seriously. Still, the more significant reason is that an external auditor is required by law to perform the audit.
What to Expect from a Financial Statement Audit
A financial statement audit doesn’t just happen to companies; they must set it in motion. That begins with finding an auditing firm to perform an audit and setting a date. Next, the auditing team forms a plan of attack, which may change throughout the audit. Finally, the auditing team collects the information needed — e.g., financial statements like balance sheets, cash flow statements, and income statements — analyzes it, and then forms an opinion.
This multi-step process assures neither party is surprised when it’s time for the audit. There are several things you can do you do to prepare for a successful financial audit, which includes gathering all relevant financial documents and making your accounting team fully available to auditors. A well-organized audit will speed up the process and decrease the chances of a misunderstanding.
What is the Audit Opinion Letter?
The audit opinion letter is the final step of an audit. Regardless of the findings, auditors must produce this document stating all financial statements viewed and audited and whether there were any errors. The audit opinion letter is typically brief, summarizing the results of the inquiry in a few paragraphs so that investors and other stakeholders can form an educated opinion about the company’s financial position.
That being said, an audit opinion letter doesn’t signify each statement, line item, or fact is 100 percent true. That level of diligence, though impressive, would take up too much time. Rather, the opinion letter is formed by performing selective spot checks, which cumulatively reflect the overall accuracy of the financial statements provided.
Are You Prepared for a Financial Audit?
A financial audit is a routine procedure for public companies, but even if your company is privately owned, it’s good practice to audit your financial statements yearly. It communicates to investors that your company is trustworthy and deserving of further investment.
If you’re thinking of auditing your financial statements, it all starts with hiring an external accounting firm. After that, all that you need to do is prepare the financial statements for review and await the audit opinion letter. So the next time you update an investor or start a new seed round, you can offer guarantees beyond just your word. Fully Accountable is prepared to meet your accounting needs. Our team of fractional accountants, controllers, and CFOs can adapt to your industry’s needs and provide custom reports that reflect your business. To get started, contact us at (877) 330-9401.