Unaudited financial statements definition

/

What are Unaudited Financial Statements?

An unaudited statement is a financial statement that has been prepared by an auditor, but for which a standard set of audit procedures have not been performed. In effect, the auditor has engaged in accounting services to prepare the statement, but has not conducted auditing services to examine the validity of the statement. Accordingly, the auditor must issue a disclaimer statement, specifically pointing out that he or she is not issuing an opinion on the statement. In addition, the statement must be labeled as unaudited.

An unaudited statement can also refer to a financial statement that was developed internally, but was not subjected to examination by an outside auditor.

Limitations of Unaudited Financial Statements

There are several limitations to the use of unaudited financial statements, which are as follows:

  • May contain errors. This type of financial statement is more likely to contain errors, since it has not been reviewed by an auditor. It may also be based upon incorrect interpretations of the applicable accounting framework, which an auditor might have spotted.

  • Rejected by outside parties. Due to the lack of auditor verification, these statements will rarely be acceptable to outside parties, such as lenders, investors, and creditors; they usually insist on only seeing audited annual statements.

  • Potential for bias. Management or preparers may have a vested interest in presenting financial results in a favorable light, increasing the risk of intentional misrepresentation.

  • Insufficient detail. Certain disclosures and explanatory notes that are standard in audited financial statements may be missing, reducing the clarity of financial information.

  • Risk of fraud. The absence of an independent audit increases the opportunity for fraudulent activities to go undetected.

  • Regulatory risks. For companies in regulated industries or jurisdictions requiring audited financial statements, unaudited ones may not meet compliance requirements.

While unaudited financial statements can provide a quick and cost-effective overview of financial performance, their limitations mean they should be used cautiously.