Financial Statement Audit Terms
Common Financial Statement Audit Terms
Annual Report – The Annual report is issued by a company. It provides the reader details on the activities and financial performance for a specific period in time. The annual report includes the financial statements. It may also include reports from the boards of directors and CEO. Those reports tend to include an overview of the companies strategy and performance.
Financial Statements – The basic financial statements of a company include the balance sheet, income statement, statement of equity, statement of cash flows, and not disclosures.
Balance Sheet – The balance sheet is one piece of a company’s financial statements. The balance sheet presents a company’s financial position on a specific date. Non Profit organizations tend to refer to the balance sheet as the statement of position.
Income Statement – The income statement is part of the company’s financial statements. The income statement measures the financial performance of an organization over a specific time period.
Disclosures – Financial statement disclosures are included as part of a complete financial statement. The disclosures are a key component to the financial statements. The note disclosures tell the reader of the accounting policies used and applied in presenting the statement. The disclosures are an integral part of the financial statements.
Generally Accepted Auditing Standards (GAAS) – GAAS provides guidelines for a financial statement auditor. Audit standards are in place to provide consistency between audit engagements. GAAS helps to strengthen the readers’ confidence in the financial statements being presented.
Audit Report – The audit report is an integral part of a company’s financial statements. The audit report states the independent auditor’s conclusions of the statements. The intent of the report is to conclude on whether the statements are presented fairly in all material respects in accordance with accounting standard’s generally accepted in the United States.
Assurance – An auditor’s responsibility is to determine their level of confidence in the presentation of the financial statements. The auditor is responsible for obtaining reasonable assurance on whether the financial statements are materially accurate. The auditor uses GAAS in order to determine their conclusion.
Engagement Letter – Accountants use engagement letters for all types of services. The engagement letter serves to provide an understanding between the accountant and the client as to the level of service they are to provide. An accountant can provide three levels of service on financial statements; audit, review or compilation. It is important to understand what level of service is being provided.
Materiality – Materiality is a key term used by financial statement auditors. Materiality refers to whether the omission or misstatement would influence the readers decisions made based on the financial statements.
Representation Letter – A representation letter is prepared for all audit and review engagements. This letter comes from the company and is written to the accountant or auditor. It details the company’s understanding of its responsibility in regard to the financials statements. While the auditor or accountant will issue a report that discloses their views on the financial statements, the financial statements are ultimately the responsibility of those who are charged with the company’s governance.
Management Letter – A management letter is prepared by the auditor and given to management at the conclusion of the audit. The management letter discloses concerns and suggestions that were noted during the audit.