Question

what is the purpose of an audit performed by a CPA

Test Your Knowledge81 Test Your Knowledge How do ledger and journal entries interact with one another? s 5. What are the three categories used 2 Explain how the ledger provides the within the statement of cash flows? information needed to prepare the bal- ance sheet. Explain how the ledger provides the information needed to prepare the operating statement. What is the main purpose of the state- Why are these categories important for understanding an organization's cash situation? Differentiate between the direct and the 6. indirect methods for preparing and pre- senting the statement of cash flows. ment of cash flows?

Answer 1

The business is owned by the investors, but it is managed by the executive body known as the board of directors. The CPA is appointed to audit the financial statements prepared by the management, as an assurance that the business is run in the best interests of the stakeholders of the company. The audited financial statements is the opinion provided by the CPA to the users of the financial statements as to the veracity of the contents thereof, and also whether the reports are prepared in accordance with the proper financial reporting framework.

1. The process of preparation of the financial statements has to go through stages. The first stage is journalization, which means recording the financial transactions in the journals in the form of journal entries in chronological order. The next stage involved is classification, where, similar transactions are grouped together in ledger accounts. But that can be done only once the items are posted from the respective journals to the ledger.

2. The third stage in the financial accounting process is summarization, where all the outstanding ledger balances are extracted and used to draw up the trial balance. All the credit balances are listed on the credit side, and all the debit balances on the debit side. The total of the debit side of the trial balance should equal the total of the credit side. The non-temporary accounts ( i.e assets, liabilities, and owners' equity ) are carried to the balance sheet.

3. All the temporary accounts ( revenues and expenses, gains and losses ) are carried to the Operating Statement.

4. The main purpose of the statement of cash flows is to depict how and why the change in cash and cash equivalents has occurred between two financial years.

5. Operating Activities, Investing Activities and Financing Activities.

Firstly, it is important to known how much cash has been generated from operations. Whether it is enough to finance the expansion needs of the company. How much was the free cash flow for the year? How efficiently was the working capital managed during the year ?

The investing activities pertain to cash flows relating to acquisition and disposal of fixed assets and investments.

The financing activities section deals with the sources of finance of the business, and the redemption / retirement/ repurchase of such amounts. How much interest was paid during the year. How much was paid out in dividends.