Financial audit and its importance

Question

What is a financial audit and what is its importance?

Answer

A financial audit is an independent inspection of a company’s full financial statements (including the balance sheet, income statement and cash flow position) and disclosures by an auditor. An audit is essential in order to verify whether a company’s financial statements give a true and fair view of the company’s financial health and performance. The reason for this is because there are a number of stakeholders who rely on this information such as banks (lenders), investors, employees, etc. For example, a bank needs accurate information regarding a company’s financial health and liquidity, in order to determine if the company will be able to repay the loan (the principle as well as the interest payments). Shareholders, on the other hand, are individuals that have shares in a company, but may not be involved with its day to day running activities. As such, an independent audit of the firm’s financial statements is important in order to give them a true picture of how well the company is performing, in order to decide whether they should hold, sell or buy more shares.

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