Audit report on the financial statements can be used in many different purpose, and for many different requirements. For example, it is required by board of directors, shareholders, entity’s board of management, as well as general tax department. These entity use the audit report to assess the quality of information that present in the financial statements.
Before going to the purpose of audit on financial statements, we should know what is audit of financial statements first. Audit of financial statement is basically refer to the examination of entity’s financial statements by an independence audit firm.
Once the audit on financial statements is completed, auditor will issue its opinion on those financial statements. To answer the question what is the purpose of financial statements, explaining why financial statement need to be audited and what the audit report using for are the most importance point.
Now let start why?
Purpose of audit on financial statements:
The main purpose of audit on entity financial statements are to let audit using their technique and profession to assess whether the entity’s financial statements are prepared correctly based on the applicable accounting framework and to show the integrity of management to the owner of entity.
To make sure that audit could perform their work independence and professionally, auditor need to to make sure that they are not conflict with any kind of interest that could influence on their judgment. For example, having shares in the company, have a close relationship with management or key person in the company.
It is importance to know that the preparation of financial statements are not the responsibility of auditor. Management play the main role on preparing the financial statements also making sure that the financial statements does not contain risks of material misstatements. No mater it is cause by error or intention.
To show the integrity of management, the financial statements are requested to be audited mostly by shareholders, owners, investors, bankers , or creditors. The financial statements are also mostly required by regulators, tax authority, stock exchange, law, or sometime by group company to be audited. They want to know if the entity’s financial statements are true and fair.
Okay, now you know why do the financial statements need to be audited, and now let check whose audit reports using for,
Purpose of audit reports:
Audit report could be used for many different purpose:
- It use as the integrity evident to the owner and shareholders by management. Well, if the audit report express that financial statements are true and fair, based on this information, shareholders and investors could imply that managements have integrity to them.
- It use to attract new investors since the financial statements is reliable. Move of the new investors will look at both financial statements to see how attractive entity is, and check the audit report of see if it is reliable. If the auditors report say financial statements are not true and fair, then new investors will not relied on those financial statements.
- Using to obtain bank loan or extend bank loan, sometime. This is happen when the entity request the bank loan, and bank want to see how are the financial status of entity. Bank might want to see the audit report to those financial statements. And, sometime the bank is not request the previous year financial statements to release their loan, but it request the entity to submit their financial statements along with audit reports.
- Using to obtain credit period and extend credit period. This is happen when the entity dealing with large suppliers and asking if those suppliers could extend the credit period for them. Most of the case, the suppliers need to perform credit risks assessment and obtaining financial statements along with audit report are generally necessary.
- Using for negotiation in M&A
We hope that the above explanation help you to understand more about purpose of audit on financial statements, and the purpose of audit itself. In case, we miss some point or you need some more explanation, please feel free to drop in comment below or email us. We will try to respond as we can.