What Are the Purposes of Audit on Financial Statements?

Overview:

Audit Reports on the financial statements can be used for many different purposes, and for many different requirements. For example, it is required by the board of directors, shareholders, the entity’s board of management, as well as general tax department. These entities use the audit report to assess the quality of information that is present in the financial statements.

Before going to the purpose of audit on financial statements, we should know what an audit of financial statements is first. An audit of the financial statement is basically referring to the examination of an entity’s financial statements by an independent audit firm.

Once the audit on financial statements is completed, the auditor will issue its opinion on those financial statements. To answer the question what is the purpose of financial statements, explaining why financial statements need to be audited and what the audit report using for is the most important point.

Now let’s start with why?

Purpose of audit on financial statements:

The main purpose of audit on entity financial statements is 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 or entity.

To make sure that audit could perform their work independently and professionally, auditors need to make sure that they are not in conflict with any kind of interest that could influence their judgment.

For example, having shares in the company, having a close relationship with management, or a key person in the company.

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It is important to know that the preparation of financial statements is not the responsibility of the auditor. Management plays the main role in preparing the financial statements and also making sure that the financial statements do not contain risks of material misstatements. No matter whether it is caused 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 authorities, stock exchange, law, or sometimes by group companies to be audited. They want to know if the entity’s financial statements are true and fair.

Okay, now you know why the financial statements need to be audited, and now let’s check whose audit reports using for,

Purpose of audit reports:

An audit report could be used for many different purposes:

  • Its uses as the integrity evident to the owner and shareholders by management. Well, if the audit report expresses that financial statements are true and fair, based on this information, shareholders and investors could imply that managements have the integrity to them.
  • It uses to attract new investors since the financial statements are reliable. The move of new investors will look at both financial statements to see how attractive the entity is, and check the audit report to see if it is reliable. If the auditor’s report says financial statements are not true and fair, then new investors will not rely on those financial statements.
  • Using to obtain a bank loan or extend a bank loan, sometimes. This happens when the entity requests a bank loan, and the bank wants to see how are the financial status of the entity. The bank might want to see the audit report on those financial statements. And, sometimes the bank does not request the previous year’s financial statements to release its loan, but it requests the entity to submit its financial statements along with audit reports.
  • Using to obtain credit period and extend credit period. This happens when the entity deals with large suppliers and asks if those suppliers could extend the credit period for them. Most of cases, the suppliers need to perform credit risks assessment, and obtaining financial statements along with audit reports is generally necessary.
  • Using for negotiation in M&A
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We hope that the above explanation helps you to understand more about the purpose of audit on financial statements, and the purpose of the audit itself. In case, we miss some points or you need some more explanation, please feel free to drop in a comment below or email us. We will try to respond as we can.