Audited financial statements, which have been prepared by an independent Certified Public Accountant (CPA) on behalf of a business or non-profit organization, are used to provide financial accountability and accuracy to a company’s stakeholders and people with a vested interest in the company. In order for an accountant to properly prepare an audited financial statement, the CPA needs certain financial reports from the company. The company needs to provide their income statement, balance sheet, and statement of cash flows along with financial documentation to support these reports.
A company’s income statement can also be called the P&L (Profit and Loss) and Statement of Operations. The income statement demonstrates how revenue earned (the top line) from the sales of products and services before expenses are taken out is transformed into the net income (bottom line), the end result after revenue and expenses are accounted for. The income statement documents whether the company made a profit or not during a reported period.
The balance sheet, also called statement of financial position, is a summary of a company’s balances as of a specific date, usually the last day of the fiscal year. The balance sheet is composed of three parts: assets, liabilities, and ownership equity or net worth, with assets in one section and liabilities and net worth in the other, with the two sections balancing. The difference between assets and liabilities is a company’s net worth or equity. A company’s assets also equal their liabilities plus owner’s equity, which will show how the assets were financed, either by borrowing money (liability) or using the owner’s money (owner equity).
The statement of cash flows shows how changes in the balance sheet and income statement affect cash and cash equivalents. It also demonstrates operating, investing, and financing activities. The statement of cash flows helps investors and management determine the short-term viability of a company, specifically their ability to cover expenses.
The CPA examines these three financial statements and their supporting documentation provided by the company and assesses the overall accounting principles used. From this information the CPA creates an audited financial statement which will include an opinion, either qualified or unqualified, about the nature of the financial documents.
An unqualified opinion in an audited financial statement indicates that the CPA is in agreement with the methods used by the company to prepare their financial documents. The audit is found to be accurate, complete and fairly presented to meet the requirements of the GAAP (Generally Accepted Accounting Principles). The audit provides the CPA a reasonable basis for their opinion that the financial statements are free of material misstatements or false/missing information.
A qualified opinion indicates that the CPA is not in agreement with aspects of the financial statements and/or methods used to prepare their financial documents. A qualified opinion indicates that the CPA is not confident that the financial statements are correct or accurate.
Occasionally an opinion will not be given within an audited financial statement. This could be due to the fact that there were insignificant documents available to properly prepare the audit, or there were issues that need to be addressed before evaluating the accuracy of the financial documents. A lack of opinion usually indicates that a company needs to improve their accounting practices so they can meet the requirements of the GAAP (Generally Accepted Accounting Principles) of the specific jurisdiction where the business is incorporated or registered.