Audited financial statements: Overview, definition, and example
What are audited financial statements?
Audited financial statements are financial reports that have been reviewed and verified by an independent auditor to ensure accuracy and compliance with accounting standards. These statements typically include a company’s balance sheet, income statement, and cash flow statement, along with the auditor’s opinion on whether the financials present a true and fair view of the company’s financial position.
For example, a publicly traded company must provide audited financial statements to investors and regulators to demonstrate financial transparency. Similarly, lenders or business partners may require audited statements before approving loans or contracts.
Why are audited financial statements important?
Audited financial statements are essential because they provide credibility and assurance that a company’s financial records are accurate and reliable. This is especially important for businesses seeking investment, loans, or regulatory approvals.
Without an independent audit, financial statements may be subject to errors or misrepresentation, making it harder for stakeholders to assess a company’s financial health. Many industries and jurisdictions require audited statements to prevent fraud and ensure compliance with financial regulations.
Understanding audited financial statements through an example
Imagine a small business applying for a loan. The bank requests audited financial statements to verify the company’s revenue, expenses, and overall financial stability. An independent auditor reviews the company’s financial records, confirms their accuracy, and issues an audit report. Based on the audited statements, the bank decides whether to approve the loan.
In another scenario, a private company is preparing for an acquisition. The potential buyer requests audited financial statements to assess the company’s profitability and risks before finalizing the deal. The audit provides the buyer with confidence in the company’s reported financials.
An example of an audited financial statements clause
Here’s how an audited financial statements clause might appear in a contract:
“The Company shall provide the other Party with annual audited financial statements, prepared in accordance with [Applicable Accounting Standards], within [Timeframe] after the end of each fiscal year. The audit shall be conducted by an independent certified public accountant.”
Conclusion
Audited financial statements provide an independent verification of a company’s financial health, ensuring transparency, accuracy, and compliance with accounting standards. They are critical for securing financing, attracting investors, and meeting regulatory requirements.By requiring audited financial statements in contracts, businesses can enhance trust with stakeholders, reduce financial risks, and demonstrate financial accountability.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.