An examination of a company's financial statements is called an audit. This is usually reported in the annual report of the company prepared by the auditors. Usually, this refers to a certain prior accounting period. An audit report based on a selective examination of an entity's activities is a mandatory requirement upon completion of the audit. The report includes a profit and loss statement, a balance sheet, a statement of changes in equity and a cash flow statement and explanatory notes, together with a summary of significant accounting policies.
An audit reflects the financial position of the entity at a particular date, including whether everything that the entity owes and is owed is properly recorded in the balance sheet and that its losses and gains are properly measured. The financial statements must be prepared in accordance with the applicable legal requirements. Once the report has been prepared, it must be approved by the company's executives (such as the board of directors) when deciding on its accuracy.
Audits may also include: asking formal and informal questions, verifying company-owned material items such as mechanical and electrical equipment, obtaining written approvals, verifying certain procedures, and overseeing the company premises.
The standards used for the proper review of the financial statements are set by the government. International Standards on Auditing (ISAs) are available on the Internet and contain clear statements that auditors should address. They consist of an introduction, objectives, definitions, requirements expressed by the words "to be performed by the auditor", the application and other explanatory material.
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