7th Jul, 2020
Listed entities are required to publish a full set of audited financial statements annually so that stakeholders and shareholders, in particular, can assess the performance of the company and take appropriate investing decisions. Entities that are not listed are not required by law to publish a full set of audited financial statements but it is always better for a company to do so, to maintain transparency and build confidence.
Audited Statements
This, however, is the statutory requirement, there are also other aspects of audited and unaudited financial statements so let us look at these statements in detail to learn what they mean for a business and how they differ in terms of the information that they convey to the end-users of the financial statements.
The key difference between audited and unaudited financial statements is the auditor’s opinion. It sets apart these two statements from each other. An auditor’s opinion carries legal weight.
Unqualified Report
If an auditor signs an unqualified audit report and financial statements, it means that the auditors carried out a complete external audit of the company and its financial statements and based on the evidence that was collected and assessed.
The auditor can vouch that the financial statements do not contain any misrepresentation and are true and fair.
What does this mean for the end-users?
This means that the investors can rely on the financial statements and the information that they contain.
Qualified, Disclaimer or Adverse Report
Similarly, an auditor may issue a qualified opinion, disclaimer of opinion, or adverse opinion. This would mean that based on the evidence that the auditors have collected, they have concluded that the financial statements are not free from material misstatement or error and thus do not represent a true and fair view of the financial position of the company.
This is why auditor`s opinion carries legal weight, as it can be considered as communication by auditors who are an independent third party, to the stakeholders, including investors in particular. Investors use the auditor’s report, to determine whether they should invest in any company or not.
Apart from the investors' other stakeholders such as the government also relies on the audited financial statements.
It is important to note that the reliance on the financial statements comes from the fact that it has been verified by an independent auditor. This is why it is important for an auditor to be independent and “be seen” as an independent third party as well.
Unaudited Financial Statements
Unaudited financial statements do not carry any sort of audit opinion, they simply represent financial information that a company has prepared and therefore the investors can never be sure whether this information is materially correct or not. Unlisted companies are not required to have audited statements therefore they prepare unaudited financial statements, as they are not subject to the same level of scrutiny as listed companies.
Since there is no third party verification of statements, investors such as angels and venture capitalists cannot completely rely on the financial statements and therefore these investors usually take a much closer look at the company, its performance, and strategies before investing in its equity. Since there is no statutory requirement for unlisted companies to publish audited statements, they usually do not do it because it takes both time and resources to get an external audit done.