Audits

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Audits of Financial Statements A financial audit is an examination of a company's financial statements performed by a firm of certified public accountants (CPAs).

The basic purpose of this audit is to provide decision makers outside the business organization with an independent expert's opinion as to the fairness of the financial statements. Auditors use the term "fair" in describing financial statements which are complete, unbiased, reliable, and presented in conformity with generally accepted accounting principles.

The Nature of a Financial Audit. The financial statements of a business are prepared by the company's management. An audit of these financial statements is intended to bridge the "credibility gap" which otherwise might exist between the company's management and the users of these statements.

For the auditors' opinion to have credibility, however, the auditors must (1) be independent of the company issuing the statements and of its management and (2) have a sound basis for their opinion. The term audit describes the investigation which the auditors undertake to provide the ...
... basis for their opinion.

As part of a financial audit, the CPAs study and evaluate the internal control structure within the company issuing the financial statements. This study gives them a "feel" for the accuracy and reliability of the information in the company's accounting system.

Next, the auditors gather evidence to substantiate every material item shown in the company's financial statements. For example, the CPAs count portions of the company's inventory and compare these test counts with the company's inventory records.

They confirm some of the accounts receivable by contacting the debtor. In those areas in which internal control is weak, the auditors must gather more evidence from outside the organization, as they have less reason to rely upon the information contained in the company's accounting system.

In addition to substantiating the items shown in a company's financial statements, auditors perform procedures to determine that these statements and the accompanying notes are complete. For example, auditors apply procedures which are designed to bring to light any unrecorded liabilities.

Auditors' Reports. Upon concluding their investigation, the auditors issue an auditors' report, expressing their opinion as to the fairness of the financial statements. The report accompanies the financial statements whenever they are issued to persons outside the business organization.

A report by a CPA firm might read as follows To the Stockholders and Board of Directors of CD Technologies:

We have audited the accompanying balance sheet of the CD Technologies as of

December 31, 19 , and the related statements of income, retained earnings and cash flow for the year then ended.

These financial statements are responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted out audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CD Technologies as of December 31,19 ,and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.

Springfield, MO White & Company

January 29, 19

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