Thursday, November 12, 2009

Audited Financial Statements Procedures

Audited Financial Statement Procedures

Audited Financial Statement Procedures
By Neil Rischall

Audited financial statements, which have been prepared by an independent Certified Public Accountant (CPA), are used to provide financial credibility, accountability and accuracy for a business. There are specific procedures performed by the CPA during the audit process.

An engagement letter, which is a letter of agreement which stipulates the services to be performed by the CPA and the fees associated with such service, is signed by both the CPA and the company having the audited financial statement done. This letter is designed to prevent misunderstanding between both parties and to reduce the risk of law suits.

The accountant will request financial reports from the company to review. These reports include the income statement, balance sheet, and statement of cash flow along with financial documentation to support these reports. The auditor will review the company's internal control system to determine what controls are in place and assess the control risk of the controls failing to detect or correct any material misstatements in the accounting records which could affect the financial statements, review specific financial statement items required by the AICPA Statements on Auditing Standards (SASs), and documentation about financial statement items they deem necessary. The auditor is also required to: confirm accounts receivable, observe the inventory count, inquire with client's lawyers regarding any litigations, claims, or assessments, evaluate accounting estimates made by management confirm business activities and account balances with outside entities, assess the degree of risk that fraud will cause a misstatement in the financial statements, document the fraud risk factors, and detail the client's response to these risk factors.

A client representation letter is provided to the company to sign at the conclusion of the audit. The purpose of this letter is for the client to take responsibility for the written statements explicitly or implicitly given to the auditor by management; such as management's acknowledgment of its responsibility for the fair presentation of the financial statements, compliance with laws and regulations, assertion that they are unaware of any fraudulent activity and have implemented procedures to detect and prevent fraud.

From this information the CPA creates an audited financial statement which will include an opinion, either qualified or unqualified, about the nature of the financial documents. The intention of the audit of financial statements is to gather evidence that will ultimately produce and support an opinion about the audit as well as defend the auditor if a lawsuit resulted from reliance on the audit opinion. The goal of an audited financial statement for a company is to provide the CPA with a reasonable basis for an unqualified opinion that the financial statements are free of material misstatements or false/missing information. With an unqualified opinion, the audit is found to be accurate, complete and fairly presented to meet the requirements of the US GAAP (Generally Accepted Accounting Principles). A qualified opinion indicates that the CPA is not in agreement with aspects of the company's financial statements or accounting procedures and is not confident in the accuracy of the financial statements.

Neil Rischall is the CPA behind the CPABookkeepers site which has a wealth of information about audited financial statements as well as all services provided by a Certified Public Accountant.

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