In Pursuit of Profit
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Audited Financial Statements Explained
Audited Financial Statements are a complete set of all four financial statements (the Income Statement, Balance Sheet, Statement of Cash Flows, and Statement of Shareholder’s Equity) that include all footnotes and disclosures required by US GAAP (Generally Accepted Accounting Procedures), which have been examined by a CPA (Certified Public Accountant).
The CPA must follow Generally Accepted Auditing Standards for the performance of the audit and conclude with the issuance of an audit report attesting to the fairness, in all material respects, of the financial statements taken as a whole. This includes not only accuracy of the amounts, but appropriateness of the presentation, including related footnotes and disclosures.
Are Financial Statement Audits Legally Required?
When a small business is considering whether or not to undergo an audit, there are several factors to consider. First and foremost, the company should determine if an audit is legally required. In some cases, businesses may be required to undergo an audit as a condition of doing business with certain regulatory agencies or in order to obtain certain licenses or permits. All publicly traded companies are required by the Securities and Exchange Commission (SEC) to submit, audited financial statements on an annual basis, including footnotes and a Management Discussion & Analysis (MD&A).
Privately held small businesses may need audited financial statements for a variety of reasons, including securing a loan or line of credit, attracting investors, or satisfying the requirements of investors or regulatory agencies. An audit provides an independent assessment of a company's financial statements and can provide assurance to stakeholders that the statements are accurate and reliable.
When is an Audit Optional but Recommended?
A small business may choose to undergo an audit in order to improve its credibility and reputation, usually ahead of an event or transaction, such as borrowing, taking on outside investment, or putting the company up for sale. An audit provides an objective assessment of a company's financial statements, which can help to build trust with stakeholders such as investors, lenders, and customers. However, the benefits do not end there. Audited financial statements can also help to identify potential weaknesses in a company's financial reporting processes, which can then be remediated.
How Much do Financial Statement Audits Cost?
While the cost of an audit will vary depending on the size and complexity of a business, audits are expensive and they require a significant investment in time, particularly in the preparation of documents and records to be submitted to the auditors. As such, a small business should carefully weigh the potential benefits of an audit against the cost in order to determine if it is a worthwhile investment.
One way that a small business can minimize the cost of an audit is to ensure that its financial records are well-organized and accurate and that they have a documented internal control structure that is appropriately followed. By taking these steps, a small business can reduce the amount of time and effort required by the auditors, which can in turn help to lower the cost of the audit.
Note: Audits are NOT Fraud Finders!
It's important to note that a financial statement audit is not designed to detect fraud. If you have reason to believe you may have malfeasance, defalcation, embezzlement or fraud in your organization, engage a forensic auditor, not a financial statement auditor to investigate.
If you are considering whether an audit is appropriate for your small business, please give us a call and we can help you make an informed decision based on your unique business needs. Our team of experienced consulting accountants will help you determine when and if your business needs audited financial statements.
About the Author
Jeff Dunn is a Partner with CFO Selections, serving as the Practice Manager for the Oregon & Southwest Washington region since establishing it in 2013. During that time, he has also served as an outsourced CFO to clients in the emerging tech space, manufacturing, distribution, digital media, and marketing industries.
Prior to joining CFO Selections, Jeff was the CFO of Getty Images, a global digital media company. During his tenure there he participated in numerous acquisitions, including taking Getty private in a PE backed transaction. Prior to joining Getty, Jeff was the VP of Finance for an ecommerce start-up, and in the Corporate Controller group at Tektronix. He began his career in Audit and Assurance at Deloitte.