In applying for a loan for your business, lenders, and creditors will ask for your financial documents, such as a profit and loss statement, cash flow statement, balance sheet, and so on. These help lenders assess your creditworthiness and your ability to pay back a loan.
Most lenders in Nashville require financial statements to be audited by a CPA firm or an independent CPA. An audited financial statement provides creditors with the assurance that your reports are a fair and accurate representation of your business’ financial performance and position.
Other parties that will want to see your audited financial statements include:
- The Securities and Exchange Commission, if you’re a publicly owned company
- Suppliers who are looking into extending trade credit to your company
- Potential investors who want to assess the viability of your business
- Shareholders and existing investors who want to get fair, credible, and accurate information about the business’ financial health
What does a CPA look at in auditing your financial statements?
In conducting the audit, a CPA will go through these three stages:
- Research and risk evaluation
The auditor will gain a thorough understanding of your business and the industry in which it operates to see if there are any risks that could affect the accuracy of your financial statements.
- Internal control testing
The auditor will assess your company’s control measures to see if they are effective and they provide the necessary protection for your company’s assets. Areas to be tested include employee authorizations, the segregation of duties, and the proper management and preservation of assets. If your company’s controls are strong and effective, more complex auditing may be required. If they’re weak, the CPA might require more intensive financial assessments.
- Substantive procedures
These refer to a wide array of procedures that CPAs follow to verify the entries in financial statements. Examples include:
– Getting confirmation from banks about your balances
– Confirming the signatures on bank accounts
– Getting confirmation from your customers about your account receivables
– Assessing your annual sales figures and cutoff procedures
– Doing a physical count of your inventory
– Reviewing paid customer invoices
– Doing a physical inspection of your assets
– Validating debts and accounts payable
– Analyzing expenses recording and payments
– Checking consistency of year to year expenses
– Validating authenticity of sales
– Checking the postings of sales to ledgers
The auditor’s opinion
At the end of the audit, the CPA will release an opinion letter to summarize their findings and give their perspective on your financial statements. The opinion letter can be one of the following:
- Unmodified or unqualified opinion
This means that the CPA found your financial statements to be accurately prepared and conformant to acceptable accounting standards
- Qualified opinion
The CPA has found some gaps and issues in your accounting procedures, but your financial statements are basically accurate. After you’ve rectified the issues, you can get an unqualified opinion.
- Adverse opinion
This means that the auditor found significant departure from acceptable accounting standards or some entries or records were misstated. An adverse opinion essentially states that certain information in your financial statements is not to be trusted. After fixing the problematic areas, you can get an unqualified opinion.
- Disclaimer of opinion
The auditor may issue a disclaimer if they were not given access to the information they needed and therefore could not conduct a proper audit.
The next time you seek financing or funding for your business, make sure to have audited financial statements ready to lend solid support to your request.
What Is an Audited Financial Statement?, Business.com
What Is Included in Audited Financial Statements, Chron.com