Your company's cash flow statement, income statement and balance sheet give readers key financial facts. Is your business mired in debt? Are your customers paying on time? Audited financial statements have been reviewed by an outside accountant who confirms the information is accurate. That gives lenders and investors confidence you're not fudging the facts to make your company look more profitable than it is. With unaudited accounts, they don't have that guarantee.
Doing Without Audits
The basic financial statements each provide different information about your company's finances.
- The balance sheet compares your company's total assets with the debts the business owes. Assets minus debts are equal to the owner's equity.
- The income statement shows the income and expenses for a given period, and the net profit or loss.
- The cash flow statement measures the actual cash earned and spent. Unlike the income statement, it doesn't deal with transactions on credit.
- The retained earnings statement covers changes in owner's equity for the period. It's the least used of the basic statements.
Having unaudited statements isn't automatically a bad thing. Unaudited financial statements show the same financial data as audited ones. But it's quicker and cheaper to draw them up than to go through the audit process. If, say, you want a cash flow statement for the month because you want to know how much money you have on hand, you can pay for a statement. This is sometimes called compilation accounting because the accountant compiles the statements from the raw data you provide.
If you're presenting a prospectus to potential investors, however, they'll want the security of audited financial statements. If you're a publicly traded company, federal regulators require that you file audited statements every year. You can still compile unaudited statements for your own use.
Audited Financial Statements
One reason audited financial statements cost more is that you have to use a certified public accountant to do the job. Compilation accounting takes your word for the accuracy of the information, but the auditor has to dig deeper. An audited balance sheet means, for example, the auditor has double-checked the information. If you report $30,000 in inventory as an asset, the auditor may inspect the inventory, or all items over a certain value, to confirm its existence.
The auditor also looks at your internal controls. Controls include, for example, internal watchdogs who monitor how money is spent. If the people authorized to spend money have nobody checking behind them, the auditor will double-check for possible fraud.
The Auditor Gives Opinions
In compilation accounting, you don't have to care what your accountant's opinion of the statements is. When a CPA audits your statement, their opinion matters big-time:
- An unmodified or unqualified opinion is the result you want. The auditor says that, in their opinion, everything in the statements is accurate and your bookkeeping conforms to standard accounting practice.
- A qualified opinion lists various problems or absent information in your statement. The auditor's saying that everything looks good except for these weak points.
- An adverse opinion is seriously bad news: it says your statements don't present your finances accurately. Investors, lenders and regulators can't rely on the information in the statements.
- A disclaimer of opinion is bad news too. The auditor's refusing to give an opinion, for example, because you didn't provide the necessary information or didn't allow time enough for a thorough audit.
If the opinion isn't favorable, the auditor will provide information on what the problems are. Common problems include a lack of information or a failure to follow standard accounting rules. If you fix the problems and resubmit the statements, the auditor should be willing to accept the changes and issue an unqualified opinion.
- Accounting Tools: Financial Statement Audit
- Public Company Accounting Oversight Board: Audit Evidence
- Accounting Tools: The Four Basic Financial Statements
- Accounting Coach: What is a Compilation?
- CFI: Audited Financial Statements
- AICPA: Reports on Audited Financial Statements
- Accounting Tools: Disclaimer of Opinion
Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com