Definition of an AICPA Financial Statement Audit
The American Institute of Certified Public Accountants (AICPA) requires external auditors to review corporate processes and internal controls when assessing financial reporting mechanisms. An external auditor also must abide by generally accepted auditing standards (GAAS), generally accepted accounting principles (GAAP) and rules the Public Company Accounting Oversight Board (PCAOB) promulgates on a regular basis.
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Definition
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An AICPA financial statement audit is an in-depth review of a corporation's accounting data summaries. It also involves tests of financial statement line items, such as assets and liabilities, and tests of individual account balances. An external auditor, otherwise known as a certified public accountant (CPA), performs financial tests to gather "sufficient and competent evidential matter." "Evidential matter" is proof upon which a CPA bases his audit opinion. "Evidential matter" is "competent" when it is relevant to the process, segment or business unit under review.
Types
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A CPA performs tests on four types of financial statements to gather sufficient and competent evidential matter. He tests a balance sheet, also called a statement of financial position, to gauge a company's economic robustness and cash availability. A CPA appraises a firm's profit potential by auditing the statement of profit and loss or statement of income. A review of a statement of cash flows helps an external auditor understand an organization's cash inflows (receipts) and cash outflows (payments) over a period of time. A CPA also reviews a corporation's statement of equity to evaluate transactions involving shareholders.
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Significance
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An AICPA financial statement audit, or a PCAOB audit, is very significant in modern economies. A company under review benefits from such an audit because top leadership can provide corrections in areas or processes that external auditors consider inadequate. A PCAOB audit also helps an investor evaluate a firm's internal controls or procedures, and how they affect corporate profitability. A regulator, such as the Securities and Exchange Commission, also reviews external audit reports to ensure conformity to government laws.
Audit Checklist
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A CPA performs a review of a company's financial statements by following four steps—learning about the control environment, testing controls, ranking risks and issuing a report. An external auditor reviews a firm's control environment to learn about internal and external factors that affect its operations. She tests financial controls to ensure adequacy and ranks them as "high," "medium" and "low," based on the loss expectation. A CPA issues a final report after discussing "high" and "medium" risks with senior management.
Considerations
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A CPA also discusses with audit committee members significant risks inherent in corporate operations. He ensures top leadership and audit committee members provide corrective measures for such risks or implement actions for remediation. An external auditor notes in an explanatory paragraph significant risks uncovered during a financial statement review.
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References
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