An audit refers to an examination of the financial statements of a company. Audits are conducted to provide investors and other stakeholders with confidence that a company’s financial reports are accurate. Audits also provide regulators with the assurance that a company is adhering to the appropriate legal and regulatory standards. It’s easy to think of an audit as a financial investigation, where a company’s financial statements are scrutinized by an external or internal auditor to ensure it is accurate and free of errors. After an audit, the auditor will provide an opinion on whether the financial statements accurately reflect the financial position of the company.
Although there are many types of audits, in the context of corporate finance, an audit typically refers to those conducted on public or private corporations. Government agencies, such as the Securities and Exchange Commission (SEC), require publicly listed companies to conduct an independent audit to validate their annual financial reporting.
For private companies, audits are not legally required but are still conducted to provide investors, banks, and other stakeholders with confidence in the company’s financial position. During an audit, different financial statements are examined, such as the income statement, cash flow statement, and balance sheet.
The audit provides stakeholders and regulatory agencies with information on how money is earned and spent throughout the fiscal year. Depending on the size of the company, an audit can span a few months to an entire year. At the end of the engagement, the auditor provides a professional opinion on the accuracy of the financial reporting done.