What are audited financial statements (AFS)?
Audited financial statements are prepared for potential investors, and creditors but especially for governing bodies, like SARS, by chartered accountants. Whilst embarking on funding for small businesses or enlisting in the stock market, investors want a guarantee that the company’s finances are legitimate.
Such cannot come from ordinary accountants. Hence, the need for audited financial statements. There are certain financial documents; which we will discuss later; that are selected for an audit, and for future investors.
The audit process.
In order to attain the necessary AFS, one has to undergo strict processes. This can be broken into three phases; planning, gathering the financial evidence for auditing, and completion.
Planning phase.
Before all else, an auditing committee is chosen. They begin to plan in accordance with generally accepted accounting principles (GAAP), abiding by the auditing standards such as the International Auditing and Assurance Standards Board (IAASB).
There is a risk assessment taken where the auditors would consider common risks associated with audited financial statements of the industry. Reassessments of the plan can be made throughout the audit.
Gathering the evidence.
Assessments are made whether or not internal controls satisfy standards. The prospective audited financial statements are viewed and then undergo control testing.
Auditors may cross-reference records with companies that have dealt with them in the past. Depending on the evidence provided, substantiative measures can be decreased.
Completing the audit.
In order to accurately determine the business’ overall financial position and performance, verification is needed from the chartered accountant as well as substantiative measures. An example could be an on-site inspection.
The inspection is done in order to detect material fraud. A chartered accountant will know what to look for, given their years of experience in the business. A note or ‘disclosure of details’ is then compiled. They will close off with an audit report, otherwise known as an opinion.
Types of audit reports (opinion letters)
- Unqualified
This type of report is sometimes called the unmodified report.
Auditors state their opinion; “the financial statements give a true and fair view…”. When receiving an unqualified report, you may rely on the audited financial statements of the company.
- Qualified
When receiving this type of opinion at the end of an audit there are non-pervasive misstatements. It would pertain to certain financial statements. Such a report would state that the audited documents; “In our opinion, except for” then adding the description of the error “the financial statements give true and fair view…”.
- Adverse
An adverse report would mean that the audited financial statements have pervasive misstatements. Such a report would go as follows: “In our opinion, the financial statements do not give a true and fair view…”.
- Disclaimer of opinion
The disclaimer of opinion report would state;” We do not express our opinion…” generally meaning that insufficient evidence was supplied.
Types of audited financial statements.
There is an order for the completion and submission of the primary financial statements in an audit. It begins with the correct trial balance sheet from the previous month, and after that, the order goes as follows:
Income statements.
The company’s level of reporting revenue plays an integral part in the audited financial statements’ opinion. The income statement includes expenses and profits. It may also show if the company is operating at a loss.
Net profit or loss determines a company’s performance.
Balance sheets and statement of change in equity.
Different from the income statement, the balance sheet projects the financial position of a business. It includes all equities, assets and liabilities.
Taking their current difference in assets and liabilities, a company’s working capital is thus derived.
The statement of equity is also included in the balance sheet, and may however be included separately. Having an extensive list of equity is enticing to creditors.
Statement of cash flow.
Investors look for a company’s available cash to determine the likelihood of repayments. Operational cash flow, investments, and all other financing activities are good signs of cash flow. Any on-demand holdings are included in this statement.
Who is required to have audited financial statements?
A company’s public interest score (PI score) usually determines whether a company’s finances must undergo auditing or be independently reviewed. If your PI score is 350 points or above, your company will need to submit an audit.
Types of audits.
There are various audits that one can undergo; yet the main types are internal audits, external audits, and tax audits.
Internal audit.
An internal audit is usually done within the company with their appointed employees as auditors. Doing so aims to improve compliance and eliminate financial malpractice around the collection of data for financial statements and all other related activities.
It isn’t uncommon, however, for a company to hire external auditors when performing an internal audit.
Tax audit.
Amongst the stricter audit processes, tax auditors are assigned and regulated by governing bodies. They are generally tax officers who understand compliance standards.
The purpose is to ensure that submitted tax returns follow tax laws.
Audit of financial documents.
This type of audit may be the first that comes to mind. Conducted by independent
external auditors to determine whether financial statements are accurate and free of any misstatements.
The aim of most audits is to evaluate current business operations with regard to governing laws and regulations.
Amongst the main covered audits, there are other audits such as; compliance, forensic, statutory, and integrated audits to name a few. Usually, external boards determine which audit needs to be performed.
