Audited vs. Unaudited Financial Statements: What’s the Difference?

Financial statements are critical documents that businesses use to assess their financial health, attract investors, and comply with regulatory requirements. However, not all financial statements are created equal. The primary distinction lies in whether they are audited or unaudited.

This article will explore the key differences between audited and unaudited financial statements, their purposes, the advantages and disadvantages of each, and when businesses should consider obtaining an audit.

1. What Are Audited and Unaudited Financial Statements?

Audited Financial Statements

Audited financial statements are financial reports that have been examined and verified by an independent certified public accountant (CPA) or audit firm. The audit process follows generally accepted auditing standards (GAAS) or International Standards on Auditing (ISA), ensuring that the financial information is accurate, reliable, and free from material misstatements.

Audited financial statements typically include:

• Balance Sheet (Statement of Financial Position)
• Income Statement (Profit and Loss Statement)
• Cash Flow Statement
• Statement of Changes in Equity
• Notes to Financial Statements
• Auditor’s Report

Unaudited Financial Statements

Unaudited financial statements are financial reports prepared internally by the company or by an external accountant but without an independent audit. These statements may follow accounting standards such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), but they have not been formally examined for accuracy and compliance.

While unaudited financial statements still provide a financial overview of a company, they do not carry the same level of credibility and assurance as audited financial statements.

2. Key Differences Between Audited and Unaudited Financial Statements

3. Why Are Audited Financial Statements Important?

Audited financial statements play a crucial role in ensuring transparency and trust in financial reporting. Here are some key reasons why they matter:

a) Regulatory Compliance

In Singapore, companies that meet certain thresholds are required to have their financial statements audited. According to the Companies Act, a company must undergo an audit if it meets two of the following three conditions:

• Total annual revenue exceeds SGD 10 million
• Total assets exceed SGD 10 million
• More than 50 employees

Additionally, publicly listed companies, non-profit organizations, and certain government-related entities must have their accounts audited.

b) Investor Confidence

Investors and shareholders rely on audited financial statements to assess a company’s financial health before making investment decisions. The independent verification by auditors increases credibility and reduces the risk of fraudulent reporting.

c) Bank and Loan Approvals

Financial institutions often require audited financial statements when granting business loans. This is because audited statements provide assurance that the company’s reported earnings and financial position are accurate.

d) Fraud Prevention and Error Detection

Auditors follow strict procedures to detect material misstatements, errors, or fraudulent activities in financial statements. This helps prevent financial manipulation, ensuring that companies operate with integrity.

e) Business Valuation and Mergers & Acquisitions (M&A)

During business sales, mergers, or acquisitions, potential buyers or investors often require audited financial statements as part of the due diligence process. A clean audit report increases the likelihood of a successful deal.

4. When Are Unaudited Financial Statements Sufficient?

While audited financial statements provide significant benefits, they are not always necessary for every business. Here’s when unaudited financial statements may be sufficient:

a) Small and Medium Enterprises (SMEs)

In Singapore, many small and exempt private companies are not required to conduct audits if they fall below the financial thresholds mentioned earlier. These companies can use unaudited financial statements for internal tracking, tax filing, and business decision-making.

b) Startups and New Businesses

Startups that are in the early stages and have limited revenue or assets typically use unaudited financial statements. These statements can still be useful for potential investors or partners, though they lack independent verification.

c) Management and Internal Reporting

Companies often prepare monthly, quarterly, or annual financial reports for internal decision-making. Since these reports are meant for management’s use, an audit is not always necessary.

d) Simplified Tax Reporting

For tax purposes, small businesses may only need unaudited financial statements and supporting documents to comply with tax regulations, unless specifically required by the tax authorities.

5. Pros and Cons of Audited vs. Unaudited Financial Statements

Pros of Audited Financial Statements:

✔️ High credibility – Trusted by investors, banks, and regulatory bodies
✔️ Compliance – Meets legal and financial reporting requirements
✔️ Fraud detection – Helps uncover financial misstatements and fraud
✔️ Better decision-making – Reliable data for management and stakeholders

Cons of Audited Financial Statements:

❌ Expensive – Requires professional fees for auditors
❌ Time-consuming – Can take weeks or months to complete
❌ Detailed scrutiny – Any discrepancies may lead to legal or financial consequences

Pros of Unaudited Financial Statements:

✔️ Cost-effective – No audit fees, making it more affordable
✔️ Faster preparation – Can be completed in a shorter time
✔️ Sufficient for small businesses – Suitable for SMEs that don’t need audits

Cons of Unaudited Financial Statements:

❌ Lacks credibility – Not independently verified, raising trust issues
❌ Higher risk of errors or fraud – No external checks for misstatements
❌ Limited acceptance – Banks, investors, and regulators may not accept them

6. When Should a Business Consider an Audit?

If your business is growing or facing increased scrutiny, you may need to switch from unaudited to audited financial statements. Consider an audit if:

• You plan to apply for a business loan or attract investors
• Your company is crossing the audit exemption thresholds in Singapore
• You are preparing for a business sale, merger, or acquisition
• You want to strengthen corporate governance and transparency
• You suspect financial irregularities or fraud within the company

7. Conclusion: Which One Should You Choose?

The choice between audited and unaudited financial statements depends on your business’s size, regulatory requirements, and financial needs.

• If you are a small company or startup, unaudited financial statements may be sufficient for internal reporting and tax purposes.
• If you need to attract investors, apply for loans, or comply with regulations, audited financial statements are the preferred option.

In summary, audited financial statements offer higher credibility and compliance, while unaudited financial statements are faster and more cost-effective. Businesses should evaluate their needs carefully and decide accordingly.