What are Audited Financial Statements?

Audited financial statements are the financial statements of an organization that have been examined by a certified public accountant (CPA). Audited financials include a signed statement from the auditor, saying that the financial statements present fairly the results, financial position, and cash flows of the issuing entity. The reports included in audited financial statements are as follows:

Income statement. The income statement presents the revenues, expenses, and resulting profit or loss of the reporting entity for the reporting period.
Balance sheet. The balance sheet presents the assets, liabilities, and shareholders’ equity of the reporting entity as of the end of the reporting period.
Statement of cash flows. The statement of cash flows presents the operating, financing, and investing cash flows of the reporting entity for the reporting period.

Most larger organizations and all publicly held companies issue audited financial statements.

The auditor's statement is most valuable if it is unqualified, which means that the issuing entity was in compliance with the applicable accounting framework (such as GAAP or IFRS) in all respects. If the statement is qualified, it means that the auditor took exception to certain aspects of the financial statements, or the underlying information used to construct the statements.

The Auditor’s Opinion Letter

An essential component of audited financial statements is the auditor’s opinion letter, which states the responsibilities of management and the auditor, and then the auditor’s opinion regarding the financial statements. A sample opinion letter appears below.

[Addressee information]

Report on the Financial Statements

We have audited the accompanying financial statements of Pensive Corporation, which comprise the balance sheet as of December 31, 20X1, and the related statements of income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pensive Corporation as of December 31, 20X1, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

[Auditor’s signature]

[Auditor’s city and state]

[Date of the report]

Who Uses Audited Financial Statements?

Audited financial statements are required by numerous parties - investors, lenders, and stock exchanges - so that users can have confidence that the information in the statements is correct. In particular, a lender nearly always demands that a prospective borrower produce audited financial statements before it will agree to loan any funds.