Whether small or large corporations, every business entity prepares financial statements to convey the business information and activities undergone throughout a financial period. The financial statements of a company provide information about the financial performance and health of the entity.
The most common financial statements are income statements, balance sheets, statements of cash flow, and statements of change in equity.
Financial statements of a business entity may or may not be audited depending on the requirements under companies ordinance, tax purposes, or securing investment. The sole proprietorship businesses and partnership businesses are usually exempt from the mandatory requirement of auditing the financial statements.
However, the companies(public and private) registered under the companies’ acts are required to get their financial statements audited by the external auditors who’re independent professionals. Other entities might choose to get their statements audited for accuracy and to present a true & fair view of financial operations.
There are substantial differences between audited and unaudited financial statements of different entities. In this article, we are going to discuss the difference between the audited and unaudited profit and loss statements of business entities.
So let’s get into it.
What Is Profit And Loss Statement?
A profit and loss statement of a business entity is a statement of revenues and expenses. It summarizes all the revenues and expenses of a business entity that relates to a certain financial period.
The profit and loss statement can be monthly, quarterly, semi-annually, or annually. The other name for the profit and loss statement is an income statement.
The purpose of preparing the income statement is to get meaningful information about the company’s profitability. The income statement also gives insights into the ability or inability of the business entity to generate higher profits by increasing sales and reducing costs. Further ratio analysis from the data in income statements is used by analysts and investors.
Therefore, an income statement or Profit & Loss Statement is a very significant document for understanding the financial performance of an entity.
What Items Are Recorded In A Profit and Loss Statement?
The general items included in the income statement are revenues and expenses. However, the details of which expenses or revenues are included in the income statement depend on the system of accounting. There are two accounting systems: the cash basis and the accrual method.
Under the accrual method, the revenues are recorded when they’re earned instead of cash receipts. Similarly, the expenses are recognized when the services are received irrespective of the cash payment timeline. Therefore, the income statement made under the accrual method has revenues and expenses that are still unpaid.
However, the cash basis system recognizes income and expenses only when cash transactions are there. For instance, if the services have been given to a client but he will pay in the next financial period, the subsequent amount will be recognized in the next year’s income statement.
Besides these differences, the income statements under both accounting systems recognize revenues(direct and indirect) and expenses(manufacturing, operating, marketing & sales, administrative, general, etc.). The difference between income and expenses is the profit or loss of the entity.
Purpose of Audit
When the financial statements, including the income statement, are audited by the independent third-party auditors, the purpose is to ensure maximum transparency and prevention of any errors & frauds. Therefore, we can say that the purpose of an audit is to ensure that the business entities are abiding by the accounting principles and regulations. As well as, they’re not committing fraud using any unlawful techniques.
The audit is necessary to assure shareholders and prospective investors of a company that the profit & loss as shown in the financial statement is true and reliable. Why the companies go for independent auditors to audit is to get an independent opinion in the form of a written report. Besides, the SEC requires that third-party auditors audit the financial statement and submit an audit report.
Accountants of a company will prepare the company’s profit and loss statement, and the auditor will examine the statements in light of the economic events & transactions as shown in the company’s records. After his professional judgment, the audit prepares an audit report made public to the investors and shareholders of a company.
Audited Profit and Loss Statement
An audited profit & loss statement is a company’s financial statement that has been audited by an independent auditor or Certified Public Accountant(CPA).
The CPA will examine the records of the company to assure that the financial statements adhere to general accounting principles and auditing standards. The audited financial statements are backed by an auditor’s opinion that can be shown in the any of the following reports:
- Unqualified report (financial statements do not have any misrepresentation and true & fair view. It signifies that the investors can rely on the financial statements)
- Qualified report (financial statements are not free of errors and material misstatement. Therefore, the financial statements do not represent a true & fair view)
The CPA verification adds credibility and trust to the financial statements. As a result, investors and creditors feel more confident in doing business with such an entity.
Unaudited Profit and Loss Statement
The unaudited financial statements are not backed by the auditor’s opinions as expressed in the qualified or unqualified reports. The accounting staff prepares the profit and loss statement, but it’s not examined and verified by a third-party auditor.
Therefore, the unaudited profit & loss statements are used for internal purposes only. the investors and shareholders cannot make decisions based on the unaudited profit & loss statement.
Difference Between Audited and Unaudited Profit & Loss Statement
| Unaudited Profit & Loss Statement | Audited Profit & Loss Statement |
| Definition | |
| The unaudited profit and loss statement is not verified and backed by the auditor’s report. Therefore, the unaudited profit and loss statements cannot rely on unaudited statements for financial decision-making. | The audited profit and loss statement is evaluated and verified by an independent third-party auditor who writes a qualified or unqualified report for a company’s financial statements. The auditor’s report is backed by his assessment and professional judgment. |
| Preparation(accountant vs. auditor) | |
| The company’s internal accounting staff is responsible for preparing the profit and loss statement. Therefore, it can be said that the unaudited profit and loss statement is prepared by an entity’s employees. | Audited profit and loss statements are not prepared by any person or party. However, the audited profit and loss statement is the same as the accounting staff prepared. However, it is backed by the auditor’s opinion in the form of an auditor’s report. |
| Verification(internal auditor vs. independent auditor | |
| A business entity might hire an internal auditor as an internal control procedure. Therefore, the internal auditor of an entity will evaluate and verify the profit & loss statement. | An independent third-party auditor is responsible for assessing and verifying the information given in the profit and loss statement. He is authorized to examine the financial records, vouchers, and any proof to support the information. He presents his view after verification. |
| Accuracy (less accurate vs. more accurate) | |
| Profit and loss statements prepared by the company’s employees have a high chance of material misstatement and errors. | The audit process ensures the accuracy of the information given in the profit and loss statement. Therefore, an audited profit and loss statement is more accurate than an unaudited one. |
| Purpose(Internal Vs. Public Ownership) | |
| The unaudited profit and loss statement is prepared to be used by the internal management to know about the financial performance. The financial decision-making of the internal management is based on the financial statements. | The purpose of the audit is to verify the information shared in the financial statements so that investors and shareholders can trust the information. Therefore, the purpose of audited statements is public interest and ownership. |
| Focus (cost. Efficiency vs. transparency) | |
| Profit and loss statement is prepared to increase profit by reducing costs or increasing revenues. Therefore, cost-efficiency is the focus of unaudited statements. | True and Fair View of Financial Health is the purpose of the audit. Therefore, transparency of financial information is the purpose of the audited profit and loss statement. |
| Cost (low vs. high | |
| The cost of preparing the profit & loss statement is not high as the internal staff prepares it who are regular employees of the company. | Independent auditors charge a high fee for performing the audit. Besides, the verification of the data and information requires resources that make audit a high-cost process. |
| Presentation(flexible vs. annual) | |
| A company can prepare the profit and loss statement monthly, quarterly, or annually. | The company’s annual profit and loss statement is audited to be published publicly. |
Wrap Up
We have shared all the differences between a business entity’s audited and unaudited profit and loss statements. We hope you will know how each of them is used for different purposes and prepared differently.
