What Is an Audited Profit and Loss Statement?

A profit and loss statement (P&L), also known as an income statement, summarizes a company’s financial performance over a specific period, such as a quarter or fiscal year. It details revenues earned and expenses incurred, showing whether the business generated a profit or a loss. This statement provides insights into a company’s operational efficiency and its ability to manage costs and revenue.

An “audited” profit and loss statement means an independent third party has thoroughly examined and verified the information. This independent review enhances the credibility and reliability of the financial data.

Understanding the Profit and Loss Statement

The profit and loss statement illustrates a company’s financial performance and profitability over a defined accounting period. These statements are prepared monthly, quarterly, or annually to provide a continuous view of financial health.

The statement begins with revenue, or sales, representing the total money earned from primary business operations. The cost of goods sold (COGS) is then deducted, including direct costs like raw materials and labor. Subtracting COGS from revenue yields gross profit, indicating the profitability of core products or services before other operating costs.

Operating expenses are then subtracted. These include costs not directly tied to production but necessary for running the business, such as selling, general, and administrative (SG&A) expenses. Examples of SG&A expenses are administrative staff salaries, rent, utilities, and marketing costs. After deducting operating expenses, the result is operating income, sometimes called Earnings Before Interest and Taxes (EBIT), which shows profit from regular business operations.

The statement then accounts for non-operating income and expenses, which are gains or losses from activities outside the company’s primary operations, such as interest earned or paid. Finally, income taxes are deducted, leading to the net income or loss for the period, often called the “bottom line.” This figure represents the company’s total profit or loss after all revenues and expenses.

What an Audit Entails

An independent audit of financial statements involves a systematic examination by a qualified professional to assess their accuracy and fairness. The primary purpose is to provide reasonable assurance that financial statements, including the profit and loss statement, are free from material misstatements, whether caused by error or fraud. This process enhances the trustworthiness of financial reporting for various stakeholders.

The independent auditor is a Certified Public Accountant (CPA) who operates externally, maintaining objectivity and impartiality. This independence is fundamental, ensuring the auditor’s opinion is unbiased and credible. While an audit offers a high level of confidence, known as reasonable assurance, it does not guarantee absolute accuracy or that every minor error will be found.

The outcome of an audit is an auditor’s opinion, formally presented in a written report. The most favorable opinion is an “unqualified” or “clean” opinion, signifying that the financial statements are presented fairly, in all material respects, according to applicable accounting principles like Generally Accepted Accounting Principles (GAAP). Other opinions, such as qualified, adverse, or a disclaimer, indicate varying degrees of concerns or limitations found during the audit.

An audited financial statement provides investors, lenders, and other interested parties with greater confidence in the reported financial information, aiding informed decisions. The audit process helps ensure transparency and accountability, particularly for publicly traded companies and those seeking financing.

The Auditing Process for the Profit and Loss Statement

When auditing a profit and loss statement, the independent auditor undertakes specific procedures to verify its reported figures. The process begins with planning and risk assessment, where auditors understand the client’s business, industry, and internal controls related to revenue and expense cycles. This initial phase helps identify areas with a higher risk of material misstatement on the P&L.

Auditors perform substantive procedures to verify specific P&L accounts. For revenue, this involves examining supporting documentation like sales contracts, shipping documents, and cash receipts to confirm appropriate recognition and recording in the correct accounting period.

For expenses, auditors review vendor invoices, payroll records, and bank statements to verify that costs are valid, properly classified, and recorded in the correct period. This includes ensuring all expenses incurred during the period are captured, regardless of when cash is paid. For example, they might trace a sample of large expense transactions from the P&L back to original source documents to confirm legitimacy.

Analytical procedures are also a crucial part of the audit, where auditors compare current P&L figures with previous periods, budgeted amounts, or industry data. Significant or unusual fluctuations identified can indicate potential misstatements, prompting further investigation. An unexpected increase in an expense category might trigger a more detailed examination.

Cut-off testing ensures transactions are recorded in the correct accounting period, which is important around the fiscal year-end. This involves examining transactions just before and after the period-end to confirm revenues are recognized when earned and expenses when incurred. Upon completing these detailed procedures, the auditor aggregates all findings and evidence to form an informed opinion on the fairness of the profit and loss statement and other financial statements. This comprehensive review assures stakeholders that the P&L provides a reliable representation of the company’s financial performance.