Purpose of Auditing Financial

Statements
by Osmond Vitez; Updated September 26, 2017

Audited financial statements are an important piece of information for investors and
economists when judging the health of a company and the overall economy. Certified
public accounting firms are tasked with auditing companies and reviewing the
application of generally accepted accounting principles--known as GAAP--in accounting
departments.

Purpose of Audits
Audits of a company’s financial statements provide an outside look into the heart of a
company’s operations. Audits ensure that financial transactions are recorded properly
on company books. While smaller companies may just have one yearly audit, larger
companies and public corporations may be subject to numerous audits throughout the
calendar or fiscal year.

Types of Audits
Large companies and public corporations have two types of financial audits for their
operations: internal and external. For large companies, internal audits are conducted by
accounting staff after the accounting period has ended. Financial statement audits
conducted by internal accounting staff do not certify the statements for outside users;
the financial statements are considered nonaudited and are usually intended for internal
purposes only. Public corporations face more requirements and regulations for auditing
financial statements. Most companies have an annual audit conducted by a public CPA
firm registered in accordance with the Securities and Exchange Commission guidelines.
Corporations may contract with a smaller CPA firm for internal audits, ensuring that the
official public audit will go smoothly.

Unqualified Opinion
After the CPA firm has finished conducting an audit, it will issue an audit opinion with
the audited financial statements. An unqualified opinion on an audit states that the
auditors believe the company has followed all accounting rules according to the
generally accepted accounting principles and the financial information as presented is
accurate. Once an unqualified audit opinion is issued, the company’s financial
statements are presented as officially audited financial statements.
Qualified Opinion
When auditors find significant or material errors in a company’s financial statements or
accounting information, they will release a qualified opinion regarding the financial
statements. This qualified opinion will state the reasons the auditors believe a company
has violated GAAP and what internal controls should be improved to correct the
information. Auditors will not sign off on the financial statements until a remedial audit is
conducted on the company accounting operations.

Importance of Audits
Audited financial statements are important because they provide an outside look at
accounting operations and the overall fiscal health of a publicly held company. Investors
rely on these audited statements to determine whether the company is a worthwhile
investment and how the company affects the overall business industry. The audited
financials also show that no fraud or corruption has been detected in the company and
that existing shareholder investment is protected.