Definition of a Financial Statement Audit

A financial statement audit is a review completed by a Certified Public Accountant who is trained to look for GAAP compliance. Therefore, this is not something that can be conducted by your employee accountant. It is to be completed by an independent CPA with no financial incentives, other than the fee to do the compliance check. Learn more about the reasons why this exists and how it improves a company's brand in any economic time.

Definition

According to Answers.com, it is "performed by a CPA for the purpose of expressing an opinion as to the fairness of the information contained in the financial statements. The audit work is conducted in accordance with Generally Accepted Accounting Principles (GAAP) and includes those reviews of internal controls, tests, and verification of data and other activities deemed necessary by the auditor." These principles are imposed to cover revenue recognition, balance sheet item classification and outstanding share measurements. GAAP calls for rules when reporting financial data via financial statements. This could be requested by the IRS, if there is suspicion of wrongdoing or error.

Function

An audit is designed to protect the shareholders from unreliable information. According to accounting firm, Price Waterhouse Cooper, the "financial report includes a balance sheet, an income statement, a statement of changes in equity, a cash flow statement, and notes comprising a summary of significant accounting policies and other explanatory notes." Bernie Madoff is a prime example why this process is valuable to the business world. He was able to inflate earnings because he had false information produced and never audited it correctly. Typically, annual financial statements are subject to audit, but interim statements are not. To restore trust, companies must show they are worthy of trust by being forthcoming regarding inquiries.

Benefits

A financial statement audit can enhance the brand of the company. It can provide workers, shareholders and the general public a secure feeling toward a company that complies with a financial statement audit. The transparency is something that is desired by the government for publicly traded companies, and it can be good for private companies, too. This can build integrity within the company to ensure workers recognize that their financials will be checked. Honesty and more responsibility is shared among the top and the bottom. Audits make it hard for a CEO to claim she did not know the financial health of the company she operates. The IRS will be less likely to audit a company that always provides an independent audit that is self-imposed. After all, if everything makes sense, there is little to worry about in any case.

History

According to a statement in Wise Geek, "Public records show that financial auditing has been in existence since 1314. However, before the 1930s, no corporations or businesses were legally required to hold audits. In 1934, the United States Securities Exchange Act made it a legal requirement for all public trading companies to be financially audited." This indicates that financial auditing has a place in any society that wants safe transactions. Financial statements are completed at the end of the financial year, and a followup audit may be completed, too.

Potential

Completing a financial statement audit can bring about improved overall economic conditions. Many people have left the stock market because of a lack of accountability in companies that have lost significant money. In time, this unfortunate trend can turn around with professionally completed financial audits. Private companies are never audited on an annual basis, but this could enhance their potential for cash infusions from outside investors. An investment in integrity could potentially save the economic impact of many businesses.

Resources

• Wise Geek