How Government’s new FDI rules ca...
On the 26th day of December of 2018, the government has made some Amendments to the existing FD...
There are a number of regulations and compliances which are required by the organization to comply with. One such compliance is to get the financial statements audited by a competent auditor. An audit increases the credibility of the organization’s performance. It shows the exact financial status of the organization. There are several stakeholders who need the audited statement. It makes sure that the organization follows the defined rules and procedures of accounting. The present article shall discuss the meaning and need for an audited financial statement.
A financial statement is said to be audited when a Competent chartered accountant has audited the statements. It is the duty of the external auditor to follow the established general accounting principles and defined auditing standards. It is important for organizations to get their financial statements audited by the CA as it increases the confidence in the eyes of lenders, etc.
There are some of the basic principles that govern the audit process of financial statements:
The objectives behind the audit of financial statements and its report are as follows:
There are several types of accounting reports and they are different from the audit report in the following manner:
Compiled reports: Every organization has an accountant who has a duty to consider every financial transaction and compile it into a single document called a financial statement. As the name suggests, the compiled reports are formed by compiling financial data into a pre-defined and structured format. The accountant is not under an obligation to verify the accuracy of the information while making the report.
Reviewed reports: In this report, the accountant verifies whether the organization follows the already established accounting standards and principles. The accountant asks basic questions from the management and makes a report after the basic review of the accounting system of the organization.
Audited reports: In this report, the auditor studies and makes an analysis of the organization’s financial records. It verifies that the inflow and outflow of money are legally made. This gives stakeholders a sense of relief as the report contains statements from the auditor which are accurate and establish the actual financial situation of the organization.
A public company is under an obligation to get its financial statements audited and submitted as per the established law.
Any company that is willing to raise capital by seeking loans from financial institutions or inviting investors to invest in the organization is required to get its financial statements audited. This creates reliability and an assurance to the investors and money lenders that the financial statements made by the company are true and do not hide any important facts.
There are basically 4 types of financial statements prepared by organizations. These are as follows:
Balance sheet: This statement defines the sum of assets, liabilities, and equity held by various shareholders in the organization. It provides a basic overview of the organization and its performance.
Cash flow statement: It is a statement stating the inflow and outflow of cash and equivalents of cash taking place in the organization’s separate bank account. Cash equivalents include short-term investments, bank deposits, overdrafts, etc. Cash in this statement is inclusive of cash in hand and money deposited in the demand deposits.
Income statement: The other name for the income statement is the profit and loss statement. It includes details of the organization’s revenue expenses and income generated in a financial year. This statement also provides information with regard to the net and gross profits, cost of goods sold and earnings of the organization before and after payment of taxes.
The process of an audit by a CA is concluded in 3 steps. These steps are defined below:
Industry research and risk assessment: A CA must have sufficient knowledge about the organization whose audit is being performed, the relevant industry and other existing competitors to assess and identify the potential risks which could possibly affect the accuracy of financial records.
Internal control testing: The CA must verify the asset protection, the working structure, the positioning of employees and delegation power to ensure that the internal control system is well-defined and does not violate the basic principles.
Thorough statement verification: At this stage, the auditor is under an obligation to assess each item stated on a financial statement. It is the duty of the auditor to verify all the uncompleted invoices, if any and contact the relevant party to verify the amount payable to identify the exact amount of liabilities. After completion of this stage, the auditor forms his opinion letter.
The audited financial statement must include the following:
CA verification: There might be a possibility of errors even after the organization tries to cover all the financial details. Thus, CA helps in removing such errors while they perform the audit function. This ensures that the financial information is accurate.
On-site inspection: If the CA feels a need to inspect the inventory, then CA is authorized to inspect the inventory kept on the site of the organization to ensure that the details provided by the organization with regards to inventory are true.
Internal control inspection: If the organization has assigned a group of individuals to look after the accounts and there is no superior authority to verify their actions, then CA is under the duty to inspect their work and ensure that the employees are not trying to manipulate the records or concealment of relevant facts leading to fraudulent activities.
The CA provides an opinion letter stating his opinion and perspective on the financial statements of an organization. There are generally 4 types of opinions which are described below:
Unmodified opinion/ Unqualified Opinion: If the CA, after performing the audit, observes that the financial statements are prepared to keep in mind the standard and accepted accounting standards and practices, then the CA gives an unmodified opinion.
Qualified opinion: If a CA gives a qualified opinion, then he is under observation that there are several small errors in the financial statements. The CA then provides the solution to rectify the errors, and once such errors have been rectified, the organization can seek an unmodified opinion from the CA.
Adverse opinion: A CA gives an adverse opinion when he is under observation that the financial statements prepared by the organization have some major flaws and investors should not rely on the financial information given by the organization. The CA can suggest some possible solutions for the rectification of such errors. After the organization rectifies the errors, it can seek an unmodified opinion from the CA.
Disclaimer of opinion: Under this, the CA does not give any opinion as the organization didn’t provide him with the required documents and time required to perform the audit function.
Such audited statements are required by the money lenders, potential investors, and stock exchange boards to ensure a sense of confidence and reliability in the financial statements prepared by the organization.
There are a few differences between audited and unaudited financial statements. These are defined below:
Creation: Only a CA has the authority to create an audited financial statement, whereas any accounting professional can create an unaudited financial statement.
Trust: The audited financial statement gives more sense of reliability and accuracy over the organization’s financial information, while the stakeholders have little faith in the unaudited financial statement.
Time: An unaudited financial statement requires less time to be created, whereas an audited financial statement takes weeks for proper evaluation and preparation of the report.
Cost: An audited financial statement is generated by an external CA. This requires the involvement of huge costs as compared to the pay given to the accountant for preparing an unaudited financial statement.
To ensure that the accounts of an organization are correct and fair, it is essential to get the financial statements audited by a Competent chartered accountant. The audit report submitted by a CA ensures that the organization is not involved in any fraudulent activities or the misuse of funds. It has been found that an in-house team of accountant misuses the fund and are involved in wrongful and obsolete accounting practices. Thus, to solve this problem, it is important that an independent CA verifies the records and provides fair and true information about the organization.
What is Financial Statement Analysis?
Basic Concepts of Financial Statement Audit