Small businesses are often required to submit audited financial statements to investors to obtain financing and help accelerate the growth of a company. A financial statement audit is an examination of an entity’s balance sheet and income statement and includes reports issued by auditors. Two reports issued are an opinion letter and a management letter. These letters are required by accounting standards and help provide investors with an overall picture of the operations of an organization.
Generally accepted auditing standards established by the American Institute of Certified Public Accountants (AICPA) govern the way auditors plan, conduct and report the results of an audit. The results of a financial statement audit are reported by the auditor to a company’s management by issuing an opinion letter. The opinion letter, otherwise known as the independent auditors report, states whether the financial statements are presented in accordance with accounting principles accepted in the United States. The management letter, also known as the internal control letter, communicates deficiencies and weaknesses in a company’s organizational structure.
An independent auditor's report is issued to communicate an auditor’s opinion as to whether or not an entity’s financial activity is reported correctly. The report is presented to investors to assure them that amounts are accurate and are correctly classified. An internal control letter is issued to communicate the status of an entity’s internal control system. In this report, the auditor details areas in a company’s organization where a misstatement in the financial statements would likely occur. A common comment identified in an internal control letter is a lack of separation of duties. This comment indicates that during a financial statement audit, an auditor identified job duties that should be separated between two or more individuals or departments, but were not.
An independent auditor's report provides one of four opinions as a result of a financial statement audit. The opinions issued are unqualified, qualified, adverse and disclaimer of opinion. According to Urlaub & Co. Accountants, an unqualified opinion has no reservations concerning the financial statements. This is also known as a clean opinion meaning that the financial statements appear to be presented in accordance with generally accepted accounting principles (GAAP). The other three opinions are less favorable. Larson Allen, CPAs, notes that the internal control letter identifies material weaknesses and significant deficiencies in an entity’s internal control. This letter identifies problems and may include recommendations from auditors as how to improve the weakness or deficiency. Often times, management provides a written response to accompany the auditor’s comments.
The letters are important because they are submitted to outside parties, such as bankers and regulatory agencies,and are often the deciding factor as to whether an entity receives financing. Also, these letters are submitted to an organization's board of directors and may be used in evaluations of management’s performance. Ultimately, negative comments deter potential business partners from engaging in future partnerships.
Financial statement audits and the resulting auditor's reports and internal control letters require major resources of an organization. To obtain these reports, entities sacrifice employee time and monetary resources. To ensure the reports and additional expenses have a positive affect, provide employees with the proper training to report all transactions in accordance with GAAP.
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