What is the purpose of an audit on financial statements?

What is the purpose of an audit on financial statements?

Overview Audit report on the financial statements can be used in many different purposes, and for many different requirements. For example, it is required by board of directors, shareholders, entity’s board of management, as well as general tax department. These entities use the audit report to assess the quality of information that is present. Before going into the purpose of audits on financial statements, we should know what an audit is first. An Audit of financial statement basically refers to the examination of an entity’s financial statements by an independent audit firm. Once the audit on financial statements is completed, an auditor will detail its opinion on the financial statements. The two main questions discussed here are (1) why financial statements need to be audited? and (2) what is the purpose of an audit report? Purpose of audit  The main purpose of an audit on an entity’s financial statements is to let an auditor assess whether the entity’s are prepared correctly based on the applicable accounting framework and to show the management integrity to the owner of the entity. To make sure that an auditor can perform their work independently and professionally, an auditor needs to make sure that they are not in conflict with any kind of interest that could influence their judgment and opinion. For example, having shares in the company or have a close relationship with management or key a person in the company. It is important to know that the preparation of these statements is not the responsibility of an auditor. Management play the main role in preparing the statements and ensuring that the statements do not contain any material misstatements whether caused by fraud or error. To enable an organisation to demonstrate the integrity of it’s management, a request to audit the statements will mostly be made by shareholders, owners, investors, bankers, or creditors. The financial statements will mainly be required to be audited by regulators such as the stock exchange, law, or sometimes by a group’s parent company. They will want to know if the entity’s are true and fair. Now that you know why financial statements need to be audited, let’s now look at what audit reports are used for. Purpose of audit reports An audit report can be used for many different purposes:

  • For management to prove their integrity to the owner and shareholders. If the audit report expresses that the statements are true and fair, then shareholders and investors can take it that management have shown integrity to them.
  • To attract new investors since the financial statements are reliable. New investors will look at both statements to see how attractive an entity is and the audit report to see if it is reliable. If the auditor’s report illustrates that these statements are not true and fair, then new investors will not rely on those and hence will be less likely to invest in the company.
  • To obtain bank loan or extend bank loan term. Banks will usually require to see the financial status of an entity as well as to check the audit report. Sometimes banks will also request the company’s financial statements are audited every year.
  • To obtain credit and extend credit period. This is normally the case when the entity is dealing with large suppliers and asking if those suppliers could extend the credit period for them. In most cases, suppliers need to perform a credit risks assessment and obtaining these along with clean audit report are generally necessary.
  • For negotiations in Mergers and Acquisitions.  If a company is being acquired by another company or group, then the acquiring company will rely on audited financial statements.

We hope that the above explanations help you to understand more about the purpose of an audit on financial statements and the purpose of audit report itself. If you have any questions or need further clarification, please feel free to contact us or speak to us on 0208 863 4566.        

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