What is a financial audit?

A financial audit is defined as an independent examination of financial statements, which includes assessing the fairness and accuracy of those statements in accordance with the applicable accounting principles. This process entails a thorough review by a qualified auditor to verify that the financial records present a true and fair view of the organization's financial position. It also involves evaluating internal controls and compliance with relevant laws and regulations.

This independent aspect is crucial because it lends credibility to the financial statements, thus assuring stakeholders, such as investors, creditors, and regulatory bodies, that the financial information is reliable and free from material misstatements. Additionally, financial audits help in identifying areas for improvement, ensuring accountability, and promoting transparency in financial reporting, which is vital for informed decision-making.

The other choices involve varying degrees of informality or lack direct oversight by an independent entity, which do not align with the rigorous standards expected in a financial audit.