Businesses will provide detailed financial statements that include the balance sheet, income statement, cash flow statement, and so forth. They do this to show their financial performance to their stakeholders such as employees, investors, regulatory bodies, banks, etc.
There then becomes a question about the accuracy of those statements, which is why a detailed audit performed by a third party can accurately assess that business’s financial statements and identify areas where improvements may be made.
The Definition of an Audit
A financial audit, which can sometimes be referred to by the name financial statement audit, evaluates a company’s financial statements from an objective point of view. Most audits happen every year.
Financial audits can technically be done internally, but a third party essentially does them. Most of the time, this will be a directive by stakeholders, which likely means using the services of a CPA (certified public accountant).
Why Is an Audit Necessary?
It can sometimes feel like being under the spotlight, but a financial audit is necessary for a few reasons. For one, it is meant to provide a “true and fair” look at the company’s financial position without any bias.
It is meant to conform to the stakeholders that everything is being done correctly, keeping the risk of fraud to a minimum. It also can ensure that the company isn’t covering up any financial impropriety. But it also works to help identify any potential processes or controls that can be improved, which enhances the business.
A Financial Review vs. Audit
There can be some confusion about the difference between a review and an audit. It is essential to know what kind of services your company will require when the time comes. There are compilations, audits, and reviews. A review will provide limited assurance where an audit would offer reasonable assurance. Reviews aren’t as detailed as a financial audit would be.