Audited financial statements are an important piece of information for investors and economists when judging the health of a company and the overall economy. Independent certified public accounting (CPA) firms are tasked with auditing companies and reviewing the application of generally accepted accounting principles — known as GAAP — in accounting departments.
TL;DR (Too Long; Didn't Read)
The purpose of auditing is to verify that a company's financial statements are a true and fair representation of the company's financial position.
Purpose of Auditing
Audits of a company’s financial statements provide an outside look into the heart of a company’s operations. Audits ensure that financial transactions are recorded properly on company books. While smaller companies may just have one yearly audit, larger companies and public corporations may be subject to numerous audits throughout the calendar or fiscal year.
Types of Audits
Large companies and public corporations have two types of financial audit procedures for their operations: internal and external. For large companies, internal audits are conducted by accounting staff after the accounting period has ended. Financial statement audits conducted by internal accounting staff do not certify the statements for outside users; the financial statements are considered non-audited and are usually intended for internal purposes only.
Public corporations face more requirements and regulations for auditing financial statements. Most companies have an annual audit conducted by a public CPA firm registered in accordance with the Securities and Exchange Commission guidelines. Corporations may contract with a smaller CPA firm for internal audits, ensuring that the official public audit will go smoothly.
What Is an Unqualified Opinion?
After the CPA firm has finished conducting an audit, it will issue an audit opinion with the audited financial statements. An unqualified opinion on an audit states that the auditors believe the company has followed all accounting rules according to the GAAP and the financial information as presented is accurate. Once an unqualified audit opinion is issued, the company’s financial statements are presented as officially audited financial statements.
What Is a Qualified Opinion?
When auditors find significant or material errors in a company’s financial statements or accounting information, they will release a qualified opinion regarding the financial statements. This qualified opinion will state the reasons the auditors believe a company has violated GAAP and what internal controls should be improved to correct the information. Auditors will not sign off on the financial statements until a remedial audit is conducted on the company accounting operations.
Importance of Auditing Financial Statements
Audited financial statements are important because they provide an outside look at accounting operations and the overall fiscal health of a publicly held company. Investors rely on these audited statements to determine whether the company is a worthwhile investment and how the company affects the overall business industry. The audited financials also show that no fraud or corruption has been detected in the company and that existing shareholder investment is protected.
- Affluent Financial Services: Audit of Financial Statements
- Investopedia: Audit
- Securities and Exchange Commission. "SEC Implements Internal Control Provisions of Sarbanes-Oxley Act; Adopts Investment Company R&D Safe Harbor." Accessed August 10, 2020.
- AICPA. "Generally Accepted Auditing Standards," Page 1599. Accessed August 10, 2020.
- Securities and Exchange Commission. "Public Company Accounting Oversight Board (PCAOB)." Accessed August 10, 2020.
- IAASB. "International Auditing and Assurance Standards Board." Accessed August 10, 2020.
- Internal Revenue Service. "IRS Audits." Accessed August 10, 2020.