What Is an Audited Financial Statement? Contents & Uses

An audited financial statement (FS) is a set of financial documents examined by an independent CPA. The audit report attached to the complete set of FS provides an opinion on whether the FS presents fairly, in all material respects, and on the company’s financial position, operations, and cash flows. It is mandatory for publicly listed companies and large nonprofits to have annual FS audits, while small businesses are only required to produce audited FS when asked to do so in specific circumstances.

Contents of an Audited Financial Statements

The complete set of audited financial statements contains the following documents, in order:

1. Report of Independent Registered Public Accounting Firm (a.k.a. audit report)
2. Profit and loss statement
3. Statement of changes in equity
4. Balance sheet
5. Cash flow statement
6. Notes to the financial statements

The audit report always precedes the actual FS because readers should first read the audit report to know the auditor’s opinion about the FS. Moreover, the audit report lends assurance to the FS, making it more credible and reliable for decision-making.

Contents of an Audit Report

1. Title: The title must be Report of Independent Registered Public Accounting Firm with emphasis on the word “Independent.”
2. Addressee: The addressee specifies the people to whom the report is addressed. Usually, the addressees are the shareholders. For example, the addressee can be stated this way: To the Shareowners and the Board of Directors of The Coca-Cola Company.
3. Opinion: This section specifies the independent auditor’s opinion about the FS. It also discusses the following items:
4. • The period covered by the audit (e.g., from December 31, 2022 to December 31, 2023)
   • The financial statements audited (e.g., consolidated statements of income, comprehensive income, shareowners’ equity, and cash flows, and its related notes)
   • The standards used and referred to during the audit (e.g., US GAAP or auditing standards of the PCAOB)
4. Basis of Opinion: This explains how the auditor arrived at their audit opinion (discussed later). If the auditor’s opinion is qualified, adverse, or a disclaimer, then this section will explain how the auditor reached the conclusion.
5. Key Audit Matters (KAM): Though not required, KAM are areas the auditor deemed to be significant during the audit. The KAM points out specific items that the auditor wants the users of the financial statements to know right out of the gate.
6. Responsibilities of Management and Those Charged with Governance: This section outlines management’s responsibilities towards the preparation of the FS. It also states the responsibilities of those charged with governance (e.g., board of directors). In other words, this section tells the reader that it is the company’s responsibility to present the FS in a fair and honest manner.
7. Auditor’s Responsibilities for the Audit of the Financial Statements: This section outlines the scope of the auditor’s work and responsibilities. It also emphasizes that the audit can only provide reasonable assurance and that it can’t uncover all misstatements that might be present in the financial statements.

Uses of Audited Financial Statements

Audited financial statements provide reasonable assurance to the FS. In auditing and attestation, reasonable assurance is a high level of assurance—not absolute assurance—given by an independent auditor to tell the users that the FS is free from material misstatement. Hence, audited FS is more powerful and credible than unaudited FS, which is why audited FS are used in the following circumstances:

Required for Regulatory Compliance

The SEC requires all publicly listed companies to have an annual FS and internal controls audit to ensure the accuracy and reliability of FS information. The audited FS and the audit report should be attached to the Form 10-K report. Moreover, quarterly reviews of interim financial statements by an auditor are also required to ensure continued transparency to shareholders.

In a small business setup, audits are not mandatory unless an agency or institution requires you to do so as part of an application or accreditation process.

Necessary for Loan or Mortgage Application

As stated earlier, audited financial statements provide assurance that the FS is free from material misstatements. That’s why creditors prefer to look at audited FS—it is more reliable and credible, especially if the independent auditor gives an unqualified opinion. While not all financial institutions require audited financial statements for every loan application, they are typically mandatory for large loans.

Crucial for Building Investor Confidence

Another use of audited financial statements is to provide investors and stakeholders with a clear and reliable picture of the company’s financial health and performance. Audited FS provides investors with information that’ll help them assess if the company is:

• Performing well in terms of revenue and cash flow
• Using company resources properly by putting them to good use
• Operating profitably to sustain itself in the long run (i.e., operating as a going concern )
• Providing the required return on investment to investors without significantly affecting the company’s overall financial position

Types of Audit Opinions

The highlight of the audited financial statements is the audit opinion or the independent auditor’s professional opinion about the company’s preparation and presentation of financial statements. In the field of attestation and assurance, the auditor’s opinion holds a significant weight in the financial statements, and any reader of the financial statement can rely on the auditor’s opinion.

When you see an auditor report, you need to take note of the following audit opinions.

Unqualified Opinion

An auditor gives an unqualified opinion (also called an unmodified opinion) when they find financial statements are presented fairly in accordance with the applicable financial reporting framework (i.e., the US GAAP). An unqualified opinion is also called a clean opinion and the best opinion that any company can get from an independent auditor.

View an unqualified audit opinion issued by Ernst & Young LLP to The Coca-Cola Company in 2023

Qualified Opinion

When the auditor finds specific issues in the financial statements that don’t warrant an adverse or disclaimer of opinion, they issue a qualified opinion (also called modified opinion). The auditor will issue a qualified opinion if there are/is:

1. Limitations of scope during the audit
2. Disagreements between the auditor and management
3. Inadequate disclosures in the financial statements that must be disclosed
4. Misstatements in the financial statements
5. Significant doubt about the company’s ability to operate at a going concern

Whenever an auditor issues this type of opinion, you should read the Basis of Opinion section to know why the auditor gave a qualified opinion. However, it’s very rare for companies to have qualified opinions in the final audit report because they strive to address and resolve all the issues pointed out by the auditor before the FSes are finalized.

See sample wording of a qualified opinion

Adverse Opinion

An auditor issues an adverse opinion if the financial statements do not fairly present the company’s financial position, operations, and cash flows. It means that the misstatements discovered during the audit are not only material but also pervasive .

The common reasons for receiving an adverse opinion are as follows:

1. Material and pervasive misstatements exist in the financial statements at a widespread level.
2. The company doesn’t follow the US GAAP.
3. There are significant omissions and inadequate disclosures.
4. Fraud is prevalent in the company, and it already affected the integrity of the financial statements.

View sample wording of an adverse opinion

Disclaimer of Opinion

A disclaimer of opinion is when the auditor cannot issue an opinion and provide assurance to the financial statements. The common culprit for a disclaimer is when the auditor was unable to do their job due to scope limitations existing during the audit and didn’t have sufficient appropriate evidence to issue an audit opinion.

Here are some reasons why the auditor would issue a disclaimer:

1. Scope limitations exist during the audit, such as the inability to gather sufficient appropriate evidence and the lack of accounting records.
2. There is significant uncertainty about the company’s ability to operate on a going-concern basis.
3. Management refuses to cooperate with the auditor in providing access to records or in interviewing personnel.
4. The auditor’s independence is compromised.

See sample wording of a disclaimer of opinion

Frequently Asked Questions (FAQs)

Bottom Line

An audited financial statement gives investors, creditors, and stakeholders more credibility and reliability than unaudited statements. With a CPA’s opinion, external users can make informed decisions based on the information in the FS.