When seeking financing for your business, lenders and investors often require a comprehensive understanding of your company's financial health to ensure they are making a sound investment. In addition to providing detailed financial statements during a pitch meeting, potential lenders may also ask to see an audited financial statement to further assess the risk involved in lending to your business. Understanding the difference between an audited financial statement and an unaudited financial statement can help you prepare to present the necessary information to potential lenders and increase your chances of securing the funding you need.
A financial statement that has been audited by a certified public accountant (CPA) is known as an audited financial statement. During an audit, the CPA reviews the financial statement to ensure that it complies with generally accepted accounting principles and auditing standards. Without this verification, investors and lenders may not have confidence in the accuracy of the financial statement being presented.
When the word "audit" comes to mind, people often associate it with the IRS investigating taxpayers for tax filing errors. However, audits can actually be beneficial for financial statements. To understand why, let's compare audited reports to two other types of accounting reports: compiled reports and reviewed reports.
Compiled reports are basic financial statements that any accountant can prepare by compiling financial records into a widely accepted financial statement format. However, the accountant does not check the accuracy of the information provided by the company. Reviewed reports undergo slightly more scrutiny than compiled reports.
Accountants use limited analytical procedures and submit inquiries to management to determine whether the financial statements need significant modifications. The accountant also verifies that the company follows generally accepted accounting principles, but does not test the company's protocols. Audited reports involve a thorough review of each item on the financial statement and internal protocol testing to ensure that the company's financial reports accurately reflect the movement of money. An audit is a proof that the financial statements are fully accurate.
For any company seeking funding from investors or lenders, it is essential to prepare audited financial statements. Most potential funders will require audited financial statements rather than unaudited ones because they offer greater accuracy and reliability.
Furthermore, if your company is publicly traded, you must produce annual audited financial statements, as mandated by federal regulatory bodies. While unaudited financial statements can be useful for internal financial assessments throughout the year, audited financial statements are critical for external reporting and compliance purposes.
To conduct an audit, a CPA should perform industry research and risk assessment, test internal controls, and thoroughly verify each item on a financial statement. An audited financial statement includes CPA verification, on-site inspection, and internal control inspection.
After completing these steps, the CPA will provide an opinion letter. This letter will include the CPA's professional assessment of your financial statements and whether they are a true and fair representation of your company's financial position. The opinion letter can also include any concerns or reservations the CPA may have about your financial statements and their accuracy. It is an essential component of the audit process and provides confidence to investors and lenders that the financial statements are accurate and reliable.
To summarize the above information, your CPA will provide an opinion letter detailing their perspective on your financial statements. There are four types of CPA financial statement opinions:
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