Unaudited Financial Statements
Unaudited financial statements are financial reports that have not been examined and verified for accuracy and completeness by an external independent auditor. While these statements are prepared based on the company’s internal records, they have not undergone the rigorous review process that audited financial statements go through. As a result, they don’t provide the same level of assurance about the accuracy or integrity of the presented information.
Key Points about Unaudited Financial Statements:
- Level of Assurance: Unlike audited financial statements, which provide an opinion from an independent auditor about the fairness and reliability of the financial information, unaudited statements do not offer any such assurances.
- Preparation: These statements are typically prepared by the company’s internal accounting or finance department.
- Use Cases: Unaudited statements can be used for internal purposes, for preliminary financial information sharing (like in quarterly reports), or in situations where audited statements are not mandatory. For instance, smaller companies that do not have publicly traded securities might not be required to provide audited statements.
- Limitations: Since they lack third-party verification, external stakeholders (like investors, lenders, or potential business partners) may be hesitant to rely solely on unaudited statements for decision-making.
- Cost-Efficiency: Getting financial statements audited can be an expensive and time-consuming process. For smaller companies or in situations where the external verification is not a mandatory requirement, producing unaudited statements might be more cost-effective.
- Regulatory Requirements: Publicly traded companies, due to regulatory requirements, typically need to have their annual financial statements audited. However, interim financial statements, like quarterly reports, might be unaudited. It’s important to check local regulatory requirements as they can vary by country and jurisdiction.
In summary, while unaudited financial statements can offer a snapshot of a company’s financial health, they don’t come with the added assurance that audited statements provide. Users of unaudited financial statements should exercise caution and may want to seek additional information or assurances when making significant financial decisions based on them.
Example of Unaudited Financial Statements
Let’s walk through a hypothetical example of a company using both unaudited and audited financial statements over the course of a fiscal year.
Scenario: ABC Tech Solutions
ABC Tech Solutions is a growing tech startup company that provides cloud-based solutions for businesses. They are not publicly traded and, therefore, don’t have a strict regulatory obligation to provide audited financial statements. However, they are considering securing a substantial bank loan and expanding their operations.
January to March (Q1):
ABC Tech Solutions has just finished its first quarter. The internal finance team compiles the income statement, balance sheet, and cash flow statement for this quarter. These documents are labeled as “Unaudited” since they haven’t been reviewed by an external auditor. These statements serve for internal performance tracking and are shared with the board of directors.
April to June (Q2):
Again, after the second quarter, the finance team prepares another set of financial statements. They are also unaudited and serve a similar purpose as the Q1 statements.
July:
The company’s leadership decides they want to take out a sizable bank loan to fund new projects and expand their operations. The bank, as part of its due diligence, requests the company’s financial statements for the past year. While the bank can review the unaudited statements from Q1 and Q2, they request that year-end financials be audited for a higher assurance level.
July to September (Q3):
The company continues its trend, creating unaudited financial statements for internal use and preliminary reporting to potential investors.
October to December (Q4):
As the year closes, ABC Tech Solutions gets in touch with an external audit firm to review their financial statements for the entire year. The process includes verifying balances, checking the accuracy of financial recording, ensuring compliance with accounting standards, and more.
January (Next Year):
The audit is completed. ABC Tech Solutions now has a set of audited financial statements for the entire previous fiscal year. They present these to the bank, which offers more confidence in the company’s financial position and performance. The bank approves their loan.
Summary:
Throughout the year, ABC Tech Solutions used unaudited financial statements for internal purposes and preliminary external communication. However, when a situation arose where higher assurance was needed (securing a large bank loan), they went through the process of getting their statements audited.
This example showcases how a company can operate using unaudited statements but might need audited ones when external stakeholders require a higher level of assurance.
