Precisely over the years, there are four primary types of financial statements that may merit auditing:
Balance sheet. A balance sheet details your company’s total assets, shareholder equity and debts at a given point in time. It is often thought of as a snapshot of your company’s performance.
Cash flow statement. A cash flow statement details the amounts of cash and cash equivalents moving in and out of your company’s bank accounts. Cash equivalents include overdrafts, bank deposits, cash-convertible assets and short-term investments. For this type of statement, cash includes both cash available on hand and money stored in demand deposits.
Income statement. An income statement, also known as a profit and loss statement, details your company’s revenue after all expenses and losses. Whereas a balance sheet is a snapshot of your company’s performance, an income statement captures that performance over an extended period. It usually includes metrics such as gross profits, net earnings, revenue, expenses, cost of goods sold, taxes and pre-tax earnings.
Statement of shareholder equity. While often included as a portion of the balance sheet, the statement of shareholder equity can be prepared separately as well. It details all changes to your company’s value to shareholders during an accounting period. Increasing equity indicates good business practices while decreasing equity may indicate the opposite.
What are the stages of an audited financial statement?
A CPA auditing a financial statement will usually move through these three stages:
Industry research and risk assessment. For proper auditing, a CPA should learn about not just your company, but its industry and competitors. With this knowledge, they may better be able to identify risks that could affect your financial statements’ accuracy.
Internal control testing. Your CPA will test your company’s internal controls to understand its processes for employee authorizations, delegation of responsibilities and asset protection. After identifying these workflows, your CPA will conduct control procedures to verify their fortitude. A strong set of procedures may merit more complex auditing, and a weak set of procedures may require extra financial assessments.
Thorough statement verification. Following the first two stages, your CPA will verify each and every item on a financial statement. For example, if your CPA is verifying your accounts payable, they may reach out to companies with whom you have uncompleted invoices to verify the amount you owe. After this stage, your CPA will be ready to offer an opinion letter.
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