Audited Financial Statements
The annual financial statements of large corporations
are used by great numbers of stockholders', creditors, government
regulators and members of the general public.
What assurance
do these people have that the information in these statements is reliable 'and is
presented in Conformity with generally
accepted accounting principles? The answer is that the annual financial statements
of large corporations are audited by independent certified public accountants (CPAs).
An audit is a thorough
investigation of every item, dollar amount, and disclosure which appears
in the financial statements, (Keep in mind that many ledger balances and other types
of information are combined and condensed in
preparing the financial statements. Consequently, only material items appear in
the financial statements.) After completing the audit, the CP As express their opinion
as to the fairness of the financial statements. This oppinion, called the auditors'
report, is published with the financial statements in the company's annual report
to its stockholders. A report by a CPA firm might read as follows:
To the Board of Directors and Stockholders XYZ Company;
We have audited the accompanying balance sheet of XYZ
Company 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
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our 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. Our audit includes examine, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our 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 XYZ Company
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.
January 29, 19 ...
Certified Public Accountants
Over many decades, audited
financial statements have developed an excellent track record of reliability. Note,
however, that CP As do not guarantee the accuracy 'of the financial statements;
rather, they render their professional opinion as to the overall fairness of the
statements. 'Fairness' in this context, means that the financial statements are
not misleading. However, just as a physician may make an error in the diagnosis
of a particular patient, there is always a possibility that an auditor's opinion
may be in error. The primary responsibility for the reliability of the financial
statements rests with the management of the issuing company, not with the independent
CP As |