Audits have become more common due to the increasing complexity of the two primary accounting frameworks. These are the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).
The on-going disclosures of fraudulent reporting by some big corporations have triggered more frequent requests for audits.
With these in mind, the article sheds light on what to expect from audited financial statements.
What are financial statements?
A complete set of financial statements typically consist of directors’ statement, income statement, cash flow statements, balance sheet, statement of changes in equity and notes to the financial statements.
Reasons for auditing financial statements
The fundamental purpose of auditing financial statements is to give an assurance that the management of the company is presenting a true and fair view of the company’s financial performance.
Aside from fulfilling the requirements of IRAS and the Securities and Exchange Commission, audited financial statements are also needed for lenders to obtain funds. They are also sometimes requested by suppliers especially when they are asked to extend trade credit in substantial amounts.
What type of company needs to be audited?
Currently, all companies in Singapore must be audited, especially public listed ones. Exceptions only apply to companies which are:
- dormant;
- a ‘small company’; and
- ‘small group’(if the company is a small company and part of a group)
Components of audited financial statements
There are several components in a set of audited financial statements. They are directors’ statement, income statement, cash flow statement, balance sheet, statement of changes in equity, auditor’s report and notes to the financial statements.
For these 5 main components, a brief description is provided below. More importantly, there will be mention of the auditor’s actions with regard to these components.
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Income Statement
This statement reports the revenue earned by a company and the expenses incurred within its fiscal year. The net profit or loss for this period will also be revealed in this report.
Essentially, it is supposed to reflect the performance of the company. If the company is publicly-traded, the earnings per share (EPS) figure will also be included.
The auditor must verify the transactions made by the company by cross-checking them against its cash book and individual books of accounts.
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Cash Flow Statement
This financial report reveals inflows and outflows of cash during the fiscal year of a company. It gives the reader an insight into whether the company has met its short-term obligations.
A cash flow statement can also give the reader an idea of whether the company can continue to operate in the foreseeable future.
During the auditing process, the auditor will verify the cash entries in the cash flow statement against the company’s bank statements. Any footnotes mentioned in the statement will also be checked for accuracy.
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Balance Sheet
A balance sheet describes the financial position of a company by the end of its fiscal year. It can also be prepared at any other point in time, like when the company is applying for a loan.
This statement contains financial information on a company’s value of assets, its liabilities and equity. Details in the assets and liabilities columns are presented in order of liquidity, starting with the most liquid items first.
The auditor will confirm the existence of assets and liabilities in the balance sheet.
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Statement of changes in equity
This statement shows the company owner’s capital at the start of the period, the changes affecting the capital, and the resulting capital at the end of the fiscal period. The auditor will check whether any changes reported in this statement is true.
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Auditor’s report
Once the audit process is complete, the auditor will issue an auditor’s report to the company, to be included with the audited financial statements.
The letter reveals the audit method used and the financial statements reviewed. It will be addressed to the company’s board of directors or whoever the top management of the company may be.
The audit opinion will state that the financial statements represent a true and fair view of a company’s performance and position. They also ensure that the financial statements contain no material errors or misstatements.
Wrap Up
Public-listed companies are obligated by law, not just in Singapore, but in every country to have their financial statements audited by an external auditor. It is also a regulation extended to almost all businesses in Singapore with the exception of a dormant company, ‘small company’ and ‘small group’.
The objective of this independent audit is to give existing and prospective investors, institutional financiers as well as suppliers an assurance that a company has presented its financial statements on a true and fair view.
If there are any errors in the financial statements, the auditor will recommend corrective measures in accordance to GAAP and IFRS.
Errors may not seem harmful to some, but they can potentially turn away the stakeholders mentioned earlier. And such loss of opportunity is definitely not acceptable to any business.
As such, it is best to have professionally trained personnel prepare these financial statements. This explains why many companies outsourcing accounting work to corporate service providers, such as Intime Accounting.
Contact us today, so that we may explain how we can best serve you!
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Disclaimer: The information contained in this blog is for general information purposes only and is not intended as legal advice. While we endeavour to provide information that is as up-to-date as possible, Intime Accounting makes no warranties or representations of any kind, express or implied about the completeness, accuracy, reliability, suitability or availability with respect to the content on the blog for any purpose. Readers are encouraged to obtain formal, independent advice before making any decisions.