The Essential Guide to Your Financial Statement Audit

A financial statement audit is an independent review of a company's financial statements to ensure accuracy and compliance with accounting principles. Certified Public Accountants (CPAs) and independent auditors are essential in executing successful audits, verifying financial statements, and upholding regulations. Business owners and auditors can leverage technology for more efficient audits by utilizing accounting software and tools.

What is the essence of a financial statement audit?

External certified public accountant (CPA) firms thoroughly audit the company's financial statements and records to portray its financial position accurately. Audited financial statements provide external stakeholders such as shareholders, lenders, consumers, and suppliers with reasonable assurance regarding the accuracy of these critical documents for their decision-making purposes.

Definition and purpose

An independent auditor conducts an annual audit to evaluate a company's financial statements and ensure they are fair and accurate, adhere to relevant accounting principles, and aren't subject to material misstatements. The purpose of the financial statement audit is twofold. They increase the transparency to build trust and ensure that the financial position and performance presented reflect reality.

For any given business, it's essential that its finance-related information – such as cash flow or operational performance – be accurately described within the framework provided by these financial statements. The financial statement audit ensures that the financial statements fairly represent the company's financial position. The U.S. Securities and Exchange Commission (SEC) requires audits for publicly traded companies.

What is the scope of a financial statement audit?

For a financial statement audit, an audit team will review the three critical statements - balance sheet, income statement, cash flow, and their footnotes. The scope of work included in such an audit involves:

• Verifying the completeness and accuracy of financial records.

• Examining internal controls to guarantee the reliability of the accounting system.

• Expressing an audit opinion on whether or not these documents are truthful.

Public companies vs private companies

Audits for publicly traded companies are subject to legal requirements. One of these requirements is to file with the Securities and Exchange Commission to protect shareholders. Public companies must adhere to Generally Accepted Accounting Standards (GAAS) and Public Company Accounting Oversight Board (PCAOB) standards. In addition, according to the Sarbanes-Oxley Act, most public companies must file an annual audit of their internal controls.

On the other hand, private companies are not subject to the requirements of the Public Company Accounting Oversight Board (PCAOB) or the Securities and Exchange Commission. Private companies must only comply with the Generally Accepted Accounting Standards (GAAS). Lenders, investors, or the merging or selling of a private company may require audited financial statements.

What are the three financial statements examined during an audit?

Financial statements provide detailed information about the company's financial performance and position. There are three primary financial statements.

Income statement

An income or profit and loss statement (P&L) summarizes the company's financial performance over a specific period. The income statement shows a company's revenue, expenses, and profits or losses.

Balance sheet

A balance sheet provides a snapshot of a company's financial position at a specific time. The balance sheet presents the company's assets, liabilities, and shareholders' equity.

Assets=Liabilities + Shareholders' Equity

Cash flow statement

The cash flow statement provides information about a company's cash inflow and outflow during a reporting period. This statement shows how changes in balance sheet accounts and income affect cash and cash equivalents. Cash flow categories include investing, financing, and business operating activities.

Each statement serves its own purpose, but they all work together to establish a checks and balances system.

Understanding Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS)

Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards(IFRS) are two major accounting standards dominating financial audits, regulating how businesses comply with various principles to ensure greater transparency regarding their financial reporting. As part of these same audit procedures, organizations must adhere to crucial auditing criteria set forth by The Generally Accepted Auditing Standards (GAAS). Companies across different industries worldwide can compile comparably meaningful pieces of financial information when generating fiscal data.

GAAP: The US standard

In the U.S., accounting principles that assure consistency and comparability in financial reporting are the Generally Accepted Accounting Principles GAAP. The American Institute of Certified Public Accountants (AICPA) set up these standards in the 1930s, with the Financial Accounting Standards Board (FASB) regulation. These principles and standards ensure that noteworthy transactions are documented extensively and that financially related documents are trustworthy. These guidelines also help keep accurate records reliable for all stakeholders who utilize them to make informed financial decisions.

IFRS: The global standard

The International Accounting Standards Board (IASB) formulated IFRS to improve transparency and standardization of financial reporting worldwide. The introduction of this set in 2000 has since replaced its predecessor, IAS, with 144 jurisdictions adopting it so far for their accounting standards.

These international auditing rules have led to a more unified framework for worldwide finance matters, ensuring all countries operate on an even field when disclosing information about these topics.

What are the stages of a financial statement audit?

Three stages take place during a financial statement audit.

1. Planning and risk assessment

The company is evaluated based on potential risks in the planning and assessment stage. With risk assessment, the auditor familiarizes themselves with the company's performance, industry, and applicable regulatory requirements. This way, the auditor can zone in on areas with a higher potential for error. By the end of this stage, an audit strategy should be in place.

2. Internal controls testing

The next step is the company's internal controls testing phase. In this stage, the external auditor identifies documents and evaluates the company's internal controls and processes to reduce the risk of fraud and errors in financial reporting. Auditors look at access restrictions, delegation of authority, proper authorization, safeguarding assets, and segregation of responsibilities.

This phase is also where inventory and account reconciliations require examination for irregularities. The internal controls testing stage ensures controls are in place and effectively working.

3. Substantive testing

The last stage is substantive testing. This stage verifies account balances and involves gathering documents supporting the data in the financial statements. These documents include confirmation letters, bank statements, and invoices. The auditor also makes note of assets such as equipment and inventory.

Auditors use these three stages to reach an independent auditor's opinion.

YT link: https://www.youtube.com/watch?v=u3TfIXFosMo

Caption: How to audit financial statements by FloQast

How can you leverage technology for efficient audits?

Advances in technology have significantly impacted the field of auditing. Technology is revolutionizing the industry's operations, from software accounting processes that improve the efficiency of the generation of financial statements to audit report efficiency and data analytics that allow for greater understanding and assessment.

Different software applications are available to make financial auditing more efficient and reliable. One of these is Shoeboxed. These tools support streamlining the audit process so that the audit runs more smoothly and quickly.

Caption: Shoeboxed is an ideal software solution for a financial statement audit.

Software solutions

The audit process involves the generation of financial statements, so the audited company is first responsible for compiling these statements.

This is where software solutions can automate and streamline the audit process with integrations, accuracy, and GAAP compliance.

Caption: Shoeboxed digitizes paper receipts to be easily accessible during an audit.

Digitizes physical receipts

Shoeboxed is a receipt scanner app and service that digitizes physical receipts and other documents, making organizing and accessing expenses with their associated receipts easier during an audit.

Caption: Shoeboxed categorizes expenses to organize financial transactions for audits systematically.

Categorizes expenses

Shoeboxed categorizes expenses into 15 preset or custom tax categories, making analyzing financial transactions systematically organized during an audit much more accessible.

Caption: Expense reports with receipt images attached make financial transactions very transparent during an audit.

Creates expense reports

Shoeboxed also creates expense reports with images of the attached receipt that can be easily accessed, making reviewing these reports more efficient during an audit. The Canada Revenue Service and the Internal Revenue Service accept these scanned images of receipts.

Caption: Integrations ensure compliance and accuracy.

Integrates with other accounting software and tools

The integration feature allows all financial data to synchronize between platforms automatically. This integration ensures uniformity in the documentation of transactions and reduces the possibility of human errors when audited. Shoeboxed integrates with accounting software like Xero, Wave, and QuickBooks.

Caption: Shoeboxed leaves a detailed audit trail.

Provides an audit trail

Shoeboxed ensures the expense management process is transparent and easy to track by providing a detailed audit trail. Software leads to a more streamlined and efficient audit process.

YT link: https://www.youtube.com/watch?v=mydtZ_Lt_Bw&t=5s

Caption: Shoeboxed Demo by Shoeboxed YouTube

What are the benefits of an audit?

Since an audit is a professional exam of a company's financial statements, the audit team ensures that those statements represent a materially correct and fair representation of a company's financial position and business activity set forth by the GAAP and issued by the FASB. This exam assures external stakeholders that investing in the company is a sound decision.

Audits provide reassurance to customers, clients, and suppliers who are conducting business with the company. They also help a company remain compliant with regulations. Auditors can help companies improve their business and accounting operations and strengthen their internal control and environment to run more efficiently and minimize the potential for fraud.

Technology within financial audits can reap many advantages, such as better speed and precision in data extraction, predictive analytics to recognize patterns and automated audit tasks that promote accuracy. Improved efficiency saves time and money.

Frequently asked questions

Who needs audited financial statements?

Insurers, loan providers, and investors look to audited financial statements to give them peace of mind before deciding whether or not they should grant the company their services. Audited financial records are necessary when making their decisions.

What is covered in a financial audit?

A financial audit is an independent examination of a business's financial records and declarations to ensure accuracy in their numbers, compliance with applicable accounting policies/estimates, and correct overall presentation. All evidence used to prove amounts presented in the company's financial statements is also examined during such external audits.

How do you prepare for an audit of financial statements?

Planning and remaining aware of accounting standards is essential to guarantee a productive audit. Software such as Shoeboxed can help you prepare by creating an audit trail with receipts and documents that are easily accessed.

Why are financial statement audits necessary?

Financial statement audits are essential for building trust in a company's financial status and accurately assessing the firm's fiscal situation. They reassure lenders, suppliers, investors, and clients that they can rely on annual reports concerning performance.

In closing

A financial statement audit is essential to assessing a company's financial health. From the use of Certified Public Accountants to technological advancements in auditing, every element involved is vital to guaranteeing accurate and dependable financial records. Business owners, investors, or anyone curious about a company's finances can significantly benefit from reviewing a company's audited statements. 

Caryl Ramsey has years of experience assisting in different aspects of bookkeeping, taxes, and customer service. She uses a variety of accounting software for setting up client information, reconciling accounts, coding expenses, running financial reports, and preparing tax returns. She is also experienced in setting up corporations with the State Corporation Commission and the IRS.  

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