|More on Financial Audits
If your company is publicly traded, the Securities and Exchange Commission requires audited financial statements. Not-for-profits may need financial audits if they receive federal or state funding. And lenders or venture capital firms may require some private borrowers to obtain audits. In some rare instances, the IRS even requests a financial audit as part of a broader tax audit. So what's the purpose of a financial audit?
Not to be confused with tax audits, financial statement audits determine whether the statements are materially correct under U.S. Generally Accepted Accounting Principles (GAAP). This generally requires the auditor to:
- Verify management's estimates and calculations;
- Examine records and source documents to support balances and transactions;
- Confirm certain account balances and transactions with third parties; and
They will also inquire about business operations, accounting procedures, risk factors and anomalies detected during audit procedures.
The goal of any financial audit is to receive an unqualified (or "clean") opinion from the CPA firm, which assures that the financial statements present the company's position and results fairly in all material respects and in conformity with GAAP.
An unqualified opinion may be issued if the financial statements are fairly stated but depart from GAAP. If a departure is severe enough, the auditor may issue an adverse opinion or refuse to issue an opinion. Either action raises a red flag to stakeholders that something is awry in the company's financial reporting system.
- Physically observe assets.