An Investor Requested Audited Financial Statements —What Should I Do?
An Investor Requested Audited Financial Statements Before Investing—What Should I Do?
Receiving interest from an investor is an important opportunity for any business. However, before committing funds, the investor may request audited financial statements for the most recent financial year—or potentially for several years.
This request should be taken seriously.
The investor is not simply asking for an income statement prepared internally. They want credible financial information that has been examined by an independent auditor. They may use the audited figures to assess profitability, cash flow, assets, liabilities and the financial risks associated with the proposed investment.
If your accounting records are complete and properly supported, the audit process may be relatively straightforward. If the accounts are incomplete, unreconciled or inconsistent with your tax filings, those problems can delay the investment and weaken your negotiating position.
The correct response is to clarify exactly what the investor requires, complete an audit-readiness review and resolve material accounting issues before the formal audit begins.
Why Has the Investor Requested Audited Financial Statements?
Investors do not want to rely solely on figures prepared by the company’s management. They need greater confidence that the financial statements are based on reliable accounting records and are not materially misstated.
The audited financial statements may help the investor evaluate:
The company’s historical revenue
Gross profit and operating margins
The sustainability of reported profits
Cash generated by the business
Outstanding customer balances
Inventory quantities and valuation
Loans and other financial obligations
Related-party transactions
Shareholder balances
Tax liabilities
Contingent liabilities and legal claims
The company’s ability to continue operating
The strength of its accounting processes
The IFRS Conceptual Framework explains that general-purpose financial reporting is intended to provide useful information to investors, lenders and other creditors when making decisions about providing resources to an entity.
An audit can increase confidence in that financial information, but it does not guarantee that the company will remain profitable or that the investment will succeed.
First, Clarify Exactly What the Investor Is Requesting
Before appointing an auditor, ask the investor or their adviser to confirm the required scope.
You should establish:
Which company or legal entity must be audited?
Are standalone or consolidated financial statements required?
Which financial periods must be covered?
What financial reporting framework should be used?
Does the investor require figures in a particular currency?
Is there a specific submission deadline?
Does the investor require a full statutory audit or another type of assurance?
Will the audit report be used only by the investor or by other parties?
Are comparative figures required?
Does the investor also plan to conduct financial, tax or legal due diligence?
These questions are particularly important when the business operates through several UAE entities, Free Zone companies, overseas subsidiaries or branches.
An investor may ask for “audited group accounts” while the company currently maintains only separate accounting records for each entity. Consolidating those records may require additional work before an audit can begin.
What Does an Audit Provide?
During a financial statement audit, the independent auditor examines the company’s financial records and obtains evidence relating to the amounts and disclosures presented in the financial statements.
Audit procedures may include:
Testing selected transactions
Confirming bank balances
Reviewing customer and supplier balances
Inspecting invoices and contracts
Attending or reviewing inventory counts
Assessing accounting estimates
Reviewing related-party transactions
Considering tax positions
Evaluating the company’s ability to continue as a going concern
Reviewing subsequent events
Assessing the presentation and disclosures in the financial statements
The auditor’s objective is to obtain reasonable—not absolute—assurance that the financial statements are free from material misstatement. International auditing and assurance standards are developed to support audit quality and public confidence in financial reporting. Learn more from the IAASB.
An audit does not:
Guarantee future revenue or profit
Determine the market value of the company
Guarantee that every fraud or accounting error will be discovered
Confirm that every customer balance will be collected
Replace financial, commercial, legal or tax due diligence
Automatically confirm that the investment is commercially attractive
These distinctions should be understood before the audited financial statements are presented to the investor.
What Will the Investor Examine Closely?
Revenue quality
The investor may examine whether reported revenue is supported by contracts, invoices, delivery records and customer payments.
They may also consider whether the business depends heavily on one customer, whether revenue is recurring and whether transactions were recorded in the correct financial period.
Profitability
A business can report strong revenue while generating a relatively small profit.
The investor may review gross margins, operating expenses, owner-related costs and unusual transactions to determine whether the reported profit is sustainable.
Cash flow
Accounting profit does not necessarily mean the company is generating cash.
If customers take a long time to pay, inventory moves slowly or the business depends on shareholder funding, the investor may question its working-capital position.
Assets and liabilities
The investor may want evidence that bank balances, inventory, equipment and customer receivables exist and are valued appropriately.
They will also want to identify loans, unpaid supplier balances, employee obligations, tax liabilities and other commitments.
Related-party transactions
Transactions with shareholders, directors, family members and connected companies often receive significant attention.
Large shareholder loan accounts or unexplained related-party payments may create concerns about governance and the reliability of the company’s reported results.
Tax compliance
The investor may compare the financial statements with VAT returns, Corporate Tax filings and other regulatory records.
Differences do not always indicate wrongdoing, but they should be properly reconciled and explained.
How to Prepare Your Company for the Audit
1. Conduct an audit-readiness review
Before the formal audit begins, review the accounting records to identify missing documents, unreconciled balances and significant accounting issues.
The review should assess whether:
All business transactions have been recorded
Bank accounts are fully reconciled
Customer and supplier balances are accurate
Inventory records are reliable
Fixed assets have been recorded correctly
Shareholder balances are properly classified
VAT and Corporate Tax records agree with the accounts
Supporting documents are available
Prior-year closing balances are correct
Finding these problems early gives the company time to correct them before they delay the audit.
2. Close the accounting records
The company should complete its bookkeeping up to the required reporting date.
This includes recording year-end adjustments for:
Accrued expenses
Prepaid expenses
Depreciation
Inventory
Bad-debt provisions
Employee benefits
Foreign-currency balances
Loans and interest
Tax liabilities
Unrecorded supplier invoices
Material adjustments should be supported and approved rather than introduced merely to produce a preferred profit figure.
3. Reconcile important balances
At a minimum, the company should reconcile:
All bank and credit-card accounts
Cash balances
Accounts receivable
Accounts payable
Inventory
Fixed assets
Loans and leases
Payroll
VAT accounts
Corporate Tax balances
Shareholder and related-party accounts
Unexplained differences are likely to generate audit questions and may affect the audit opinion.
4. Prepare a complete audit file
The documents normally requested may include:
Trial balance and general ledger
Draft financial statements
Bank statements and reconciliations
Bank confirmation details
Sales invoices and customer contracts
Purchase invoices and supplier contracts
Customer and supplier ageing reports
Balance confirmations
Inventory count sheets and valuation reports
Fixed-asset register
Property or equipment ownership documents
Loan and lease agreements
Payroll and WPS records
VAT returns and reconciliations
Corporate Tax returns and calculations
Related-party transaction schedules
Shareholder loan details
Legal claims and contingent liabilities
Trade licence and incorporation documents
Board and shareholder resolutions
Prior-year financial statements and audit reports
Budgets and forecasts may also be requested by the investor, although these are not normally covered by the audit opinion unless separately agreed.
Warning Signs That Could Concern the Investor
Common issues that may delay an audit or affect investor confidence include:
Bank accounts that have not been reconciled
Revenue that does not agree with invoices or VAT returns
Significant expenses without supporting documents
Large or unexplained cash withdrawals
Personal and company expenses being mixed
Old customer balances that may not be recoverable
Inventory that has not been physically counted
Unexplained shareholder or related-party balances
Loans without written agreements
Late or missing tax filings
Incomplete ownership records for important assets
A prior modified audit opinion
Significant losses or negative working capital
Accounting records reconstructed immediately before the investment
These issues do not automatically prevent an investment. However, the company should investigate and explain them properly.
Trying to hide a financial problem can cause greater damage than presenting it transparently with a credible corrective plan.
Understanding the Possible Audit Opinions
At the end of the audit, the auditor may issue one of several types of opinion.
Unmodified opinion
An unmodified opinion indicates that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.
It does not mean that the company has no risks or that the investment is guaranteed to succeed.
Qualified opinion
A qualified opinion indicates that a specific material issue exists, but it is not so extensive that the financial statements as a whole are unreliable.
For example, the auditor may be unable to verify part of the inventory or may disagree with a particular accounting treatment.
Adverse opinion
An adverse opinion indicates that material and pervasive misstatements cause the financial statements as a whole not to be presented fairly.
This is a serious matter and is likely to concern a potential investor.
Disclaimer of opinion
A disclaimer means that the auditor could not obtain sufficient appropriate evidence to form an opinion.
This may occur when records are severely incomplete or important information is unavailable.
A modified opinion does not necessarily end the proposed investment. However, the investor will probably ask for further explanations, protections or adjustments to the transaction terms.
Is an Audit the Same as Financial Due Diligence?
No.
An audit focuses on whether historical financial statements are presented fairly under an applicable reporting framework.
Financial due diligence is more transaction-focused. It may investigate:
Quality of earnings
Normalised profitability
Revenue concentration
Working-capital requirements
Debt-like liabilities
One-off income and expenses
Forecast assumptions
Financial risks affecting the purchase price
Matters that may require warranties or indemnities
A valuation is different again. It estimates the value of the business using financial, commercial and market information.
The investor may therefore request audited financial statements first and conduct due diligence and valuation work afterwards.
How Long Will the Audit Take?
The timeframe depends on the condition of the accounting records, the size and complexity of the business, the number of entities involved and the availability of supporting documents.
A business with completed accounts and organised records will generally progress faster than a company with missing invoices, unreconciled banks or uncertain shareholder balances.
Before promising the investor a delivery date, obtain a realistic audit-readiness assessment and agree on a document-request schedule.
How Ahmad Al Araidi Auditing Can Help
Ahmad Al Araidi Auditing of Accounts assists UAE companies preparing financial information for prospective investors.
Our support may include:
Clarifying the required audit scope
Conducting an audit-readiness assessment
Reviewing the accounting records
Identifying missing documents and unreconciled balances
Preparing supporting schedules
Reviewing VAT and Corporate Tax reconciliations
Assessing related-party and shareholder balances
Preparing financial statements under the applicable framework
Performing an independent financial statement audit, where appropriate
Supporting financial due diligence requirements
Helping management respond efficiently to investor questions
Where independence or professional requirements apply, accounting preparation, advisory work and the independent audit should be structured appropriately.
Frequently Asked Questions
Can I give the investor unaudited management accounts?
You can provide them if the investor agrees, but they do not replace audited financial statements when an independent audit report has been specifically requested.
What if my company has never been audited?
The company may still be audited, but opening balances, prior-year records and supporting evidence may require additional examination.
What if my accounts are incomplete?
A preliminary accounting cleanup or reconstruction may be necessary before the financial statements can be audited.
Will the auditor tell the investor what my company is worth?
No. A financial statement audit is not a business valuation. Valuation must be agreed as a separate service.
Can the investor speak directly to the auditor?
Potential communication should be discussed with the company and auditor. Confidentiality, reliance and report-distribution conditions must be respected.
Will an unmodified audit opinion guarantee the investment?
No. The investor will also consider commercial potential, management, legal risks, taxation, valuation and the proposed transaction terms.
Has an Investor Requested Your Audited Financial Statements?
Do not wait until the investment deadline is approaching.
An early audit-readiness review can identify missing records, resolve accounting issues and help your company present a credible financial package to the investor.
Contact Ahmad Al Araidi Auditing of Accounts to prepare your business for an investor audit.
Website: auditors.ae
Email: info@auditors.ae
Phone: +971 56 626 6391
Recommended CTA button: Prepare My Business for an Investor Audit
This article provides general information and does not constitute investment, accounting, tax or legal advice. The appropriate audit scope and financial reporting requirements depend on the company, the proposed transaction and the investor’s specific requirements.
