Financial Statements as a Business Tool
The financial statement is one of the important components of a business entity’s profile. This component has multiple uses internally and externally.
Internally, the executive management relies on the financial statements to measure the business entity’s performance and to be able to take decisions in connection with any business matter.
Externally, the stakeholders like new investors, lenders, customers, suppliers, administrative bodies and regulators, etc. rely on the financial statements to make decisions each from their own perspective.
What are The Components of Financial Statements?
Financial statements are financial reports that highlight the significant accounting information of a business entity including its financial performance, position, and cash flows.
Business entities usually prepare four main financial statements, i.e. statement of financial position, statement of income and other comprehensive income, statement of cash flows, and statement of changes in equity, in addition to notes to such financial statements and other explanatory information.
Unaudited Financial Statements
Unaudited financial statements are those that have not been examined or verified by a licensed independent auditor. Unaudited financial statements are often compiled by a business entity’s accounting and finance functions for internal use for management purposes.
Disadvantages of Unaudited Financial Statements
Unaudited financial statements will not be accepted by the administrative and regulatory authorities. They do not meet the mandatory requirements for a user of financial statements can reliably adopt in making their decisions.
Unaudited financial statements also do not provide independent third-party assurance about the accuracy of the information contained therein. There is a limited number of stakeholders who benefit from unaudited financial statements.
Audited Financial Statements
On the other hand, audited financial statements are financial reports that have been subject to independent verification and examination by a licensed auditor,
who utilizes generally accepted accounting principles such as accounting framework and International Financial Reporting Standards (IFRS). The auditor also utilizes International Standards on Auditing (ISA) for a detailed approach and methodology in performing the audit engagements.
Advantages of Audited Financial Statements
The audited financial statements provide various stakeholders with reliable information they need about the business results, financial position, and financial performance of the entity to make informed decisions.
Audited financial statements also ensure that the business entity complies with International Financial Reporting Standards (IFRS) and the laws of the jurisdiction in which it operates. The auditor can also help a business entity enhance its internal accounting processes, policies, and procedures.
Licensed Independent Auditor
Independent professional auditor certified by the administrative authorities in each jurisdiction. The auditor’s opinion indicates whether the financial statements are stated fairly following the financial reporting framework, which is normally the International Financial Reporting Standards (IFRS).
Informing an opinion, the auditor gathers sufficient and appropriate evidence to determine whether the financial statements are free of material errors or other misstatements.
Audited Financial Statements and Administrative and Regulatory Authorities
In Kuwait, it is legally mandatory to have the financial statements audited by an independent licensed auditor to be acceptable for use and submission to administrative and regulatory authorities, banks, and investors.
Those stakeholders only rely on audited financial statements in making their decisions and developing future plans.
Conclusion
All business entities are encouraged to prepare audited financial statements to underpin their business vis-à-vis regulators, administrative authorities, lenders, and investors, the audited financial statements will be considered as a sealed document of understanding the entity’s financial position.