Understanding the difference between audited and unaudited financial statements is crucial for small business owners. Whether you’re running a local auto shop or a family-owned construction company in Grande Prairie, Alberta, knowing when and why to use each type of statement can make a big difference in how your business is perceived and how it operates.
What Are Audited Financial Statements?
Audited financial statements mean they have been extensively reviewed by a Chartered Professional Accountant (CPA). Audits are completed to provide a business and other financial stakeholders with an added level of assurance on the accuracy of the business’ finances.
An audit includes the following key financial documents:
- Income Statement: This shows your business’s revenues, expenses, and profits over a specific period to demonstrate profitability of operations.
- Shareholder Equity Statement: This outlines changes in your business’s equity, showing how ownership has changed over time.
- Cash Flow Statement: This tracks cash going in and out of your business to provide an understanding of liquidity.
- Balance Sheet: This provides a snapshot of your business’s financial position at a specific point in time, listing your assets, liabilities, and equity.
What is the Auditing Process?
Auditing is a thorough, or meticulous, examination of your financial records by a CPA with a goal of validating their accuracy and legitimacy.
Below are the typical steps involved in an audit:
- Research and Planning: The CPA reviews your previous financial statements and plans the audit.
- Fieldwork: The CPA tests controls, verifies financial data, and interviews your staff.
- Drafting the Report: The CPA writes a detailed report of their findings.
- Opinion Letter: The CPA issues an opinion on your financial statements, ranging from an ‘Unmodified Opinion’ (everything looks good) to an ‘Adverse Opinion’ (significant issues found).
If issues are found, the CPA will work with you to create a correction plan.
What Are The Benefits of Audited Financial Statements?
For business owners, the benefits of audited financial statements include:
- Trust and Credibility: Audited statements build trust from stakeholders, including banks and investors as they are considered authentic.
- Legitimacy: Many lenders and investors require audited statements because they guarantee accuracy and legitimacy of the financial health of your business.
- Assurance: Knowing that your financials have been checked by an external identity can give you confidence in the businesses records and financial health, especially during tax season, during a government audit, or a dispute amongst stakeholders.
What Are Unaudited Financial Statements?
Unaudited financial statements are prepared without the external validation of a CPA. They offer a snapshot of your business’s financial status but rely more on the internal processes for record keeping. While these may cost less than an audit and happen much quicker, they may not be accepted by lenders, investors. Depending on the internal controls, unaudited financial statements can increase the risk of compliance issues and errors that can lead to misinformed decisions for the business.
A review by a CPA is another option that can provide more assurance but is less extensive and therefore costs less than a true audit. It’s best to consider who the recipients of the statements are and their requirements prior to choosing the level of financial service you need.
When Should You Use Audited Financial Statements?
Publicly traded companies are required by law to have audited financial statements and non-public businesses might need audited statements when seeking private investment, applying financing or loans, or working with a significant stakeholder, such as government contracts.
Conclusion
As a small business owner in Grande Prairie, you have the option to have audited, reviewed or unaudited financial statements. Each of these play a role in helping you make better financial decisions. Audited financial statements, while more rigorous and costly, offer credibility and assurance. Unaudited financial statements with reliable controls are more suitable for internal use and quick information on your financial health.
For tailored advice and to ensure your financial statements meet your business needs, consider consulting with a local CPA. Our team here at McNabb Lucuk LLP can provide the guidance and expertise necessary to help your business improve your financial data and reports.