What is Financial Statement Audit?

Definition: What is Financial Statement Audit?

A financial statement audit is an independent and professional examination of a company's financial statements, conducted by a licensed certified public accountant (CPA). During the audit, the accountant verifies the accuracy and correctness of the financial statements — the balance sheet, income statement, cash flow statement, and other reports — and ensures that they fairly represent the company's financial position in accordance with generally accepted accounting standards.

The auditing accountant operates with complete independence from the company itself and is not a direct employee of management. His role is to provide a professional opinion — an audit opinion — meaning that the financial statements are presented fairly and without material errors.

A financial statement audit is not an examination conducted solely to "catch" mistakes, but rather to provide assurance to investors, lenders, tax authorities, and other stakeholders that the financial statements are reliable and can be relied upon.

The Difference Between Audit and Review (Full Audit vs. Limited Review)

There are several types of accounting examinations, and they differ in scope and depth:

• Financial Statement Audit — This is the most comprehensive examination. An auditing accountant examines the data in great detail, reviews documents, evidence, account transactions, and internal systems. Upon completion, a formal audit opinion is issued.
• Accounting Review — A lighter examination in which the accountant performs selective tests and analysis of the data, but not in full depth. The result is a review letter only, without a formal audit opinion.
• Accounting Services and Financial Reporting — Here the accountant assists the company in preparing the financial statements themselves, without an independent examination.

While a full financial statement audit is the most stringent choice, there are cases where a limited review or accounting services alone are sufficient for the company's needs.

Who Needs Financial Statement Audits? Legal Obligations

In Israel, the obligation to audit financial statements applies only to certain types of companies. Not every business owner or company is required to undergo an audit:

• Public Companies — Any company whose shares are traded on the stock exchange must undergo a full annual audit.
• Large Companies (with high assets or revenues) — Companies that exceed certain thresholds of assets or annual revenues may be required to undergo an audit, depending on regulations.
• Companies with Lenders or Investors — Bank lenders or major investors may require an audit as a condition for granting a loan or making an investment.
• Associations and Non-Profit Organizations — Some associations are required to undergo an audit in accordance with association laws and the size of their budget.
• Exempt Business Owners and Authorized Business Owners — Generally are not required to undergo a full audit, and may instead only maintain accounting records and prepare an annual report.

If you are an exempt business owner or authorized business owner in Petach Tikva, Ramat Gan, or anywhere in Israel, you will typically not require a full financial statement audit — but it is important to verify your specific situation with an accountant.

What Does an Auditing Accountant Actually Do?

The audit process includes several stages:

1. Audit Planning — The accountant understands the business, identifies potential risks, and plans the scope of the audit.
2. Testing Internal Systems — Examination of internal controls, accounting processes, and the company's IT systems.
3. Testing Evidence — The accountant examines invoices, receipts, agreements, bank movements, and additional documents to validate the data in the reports.
4. Selective Testing — Sampling of documents and accounts, detailed examination of their details.
5. Interviews with Management — Discussions with managers and accountants to understand accounting decisions and risks.
6. Confirmation Letters — Requests to lenders, customers, and suppliers to confirm data relevant to them.
7. Completion of Audit and Opinion — The accountant summarizes findings and issues a formal audit opinion.

Each stage is designed to provide a high level of assurance that the financial statements are accurate.

Costs and Timeframes for Financial Statement Audits

The cost of a financial statement audit varies depending on the size of the company, business complexity, number of transactions, and the overall scope of the audit. There is no fixed price, but general ranges can be described as follows:

• Small companies — typically lower costs, depending on the scope of operations.
• Medium-sized companies — moderate costs, which vary depending on complexity.
• Large companies — significantly higher costs due to large scope and comprehensive audit.

Audit duration also varies — a small audit may take several weeks, while an audit of a large company may last several months.

Ben Or Cooks Certified Public Accountants offers a free initial consultation meeting, where we can discuss your audit needs, assess the scope and expected costs, and plan the process efficiently.

Audits in the Context of Self-Employed Individuals and Nonprofit Organizations

For exempt self-employed individuals and licensed self-employed individuals, the requirement for a full audit is relatively rare. However, every self-employed individual must maintain proper accounting records and submit an annual report to the Tax Authority. Ben Or Cooks assists self-employed individuals with proper bookkeeping and preparation of annual reports that comply with legal requirements.

Nonprofit organizations and non-profit entities may be required to undergo an audit depending on their budget size. If your organization requires an audit, our firm provides professional service and extensive experience in the field.

Comparative Table: Types of Accounting Audits

Each type of audit serves a different purpose. Choosing the appropriate audit depends on legal requirements, company size, and the needs of your stakeholders.