SAO audit: Overview, definition, and example
What is an SAO audit?
An SAO (statement on auditing standards) audit refers to an audit conducted in compliance with the auditing standards set by the American Institute of Certified Public Accountants (AICPA). Specifically, SAO audits are designed to provide assurance that financial statements are free from material misstatements and accurately represent the financial position and operations of a company. These audits are often required for publicly traded companies, nonprofits, and other organizations to ensure transparency and accountability.
The SAO audit process involves a thorough examination of a company’s financial records, internal controls, and compliance with applicable accounting standards, such as GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards). The goal is to provide stakeholders, such as investors, regulators, and lenders, with confidence that the financial statements are reliable.
Why is an SAO audit important?
An SAO audit is important because it helps maintain the credibility of a company’s financial information, which is essential for decision-making by investors, regulators, and other stakeholders. A clean audit opinion indicates that the company’s financial statements are presented fairly, without significant errors or fraud, and that the company is in compliance with relevant accounting standards.
For businesses, having an SAO audit conducted can improve investor confidence, assist in securing financing, and ensure compliance with legal or regulatory requirements. It can also highlight areas for improvement in internal controls or financial processes. For auditors, it is a way to assess the accuracy of a company's financial reporting and provide an independent opinion on its financial health.
Understanding SAO audit through an example
Imagine a private company, XYZ Inc., is planning to apply for a business loan to expand operations. The bank requires an SAO audit of XYZ’s financial statements to ensure that the company’s financials are accurate and reliable. XYZ Inc. hires an external auditing firm to perform the SAO audit.
During the audit, the auditors review XYZ’s financial records, verify that the financial statements are prepared according to the relevant accounting standards, and evaluate the company’s internal controls to assess the risk of fraud. After completing the audit, the auditors provide an audit opinion, stating whether the financial statements are free from material misstatements and whether the company’s financial reporting complies with the appropriate standards.
In another example, a publicly traded company, ABC Corp., must undergo an SAO audit annually as required by the SEC (Securities and Exchange Commission). The audit ensures that ABC’s financial statements are accurate and that the company is in compliance with the regulations governing financial reporting for publicly listed companies.
An example of an SAO audit clause
Here’s how an SAO audit clause might look in a contract:
“The Company agrees to have an annual SAO audit conducted by a certified public accounting firm to assess the accuracy and fairness of its financial statements. The audit will be performed in accordance with the standards set by the AICPA and will ensure compliance with GAAP. A copy of the audit report will be provided to all relevant stakeholders.”
Conclusion
An SAO audit is a critical process for ensuring the accuracy and transparency of a company’s financial statements. By following the auditing standards set by the AICPA, an SAO audit provides valuable assurance to investors, regulators, and other stakeholders that financial statements are reliable and in compliance with accounting standards. For businesses, undergoing an SAO audit can enhance credibility, improve internal controls, and ensure compliance with legal or financial reporting requirements.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.