What Flavor Are Your Financial Statements?

When you walked into the ice cream parlor for the first time, you had a number of flavors to choose from; should you stay with simple vanilla, move to chocolate or dive into cookies and cream. Each flavor has its’ own taste and depending on the reason for your trip, your taste may differ. The same is true when it comes to your financial statements.

You need help preparing your financial statements and are not sure what direction to take. Your first step is to determine the purpose of the financial statements: internal use, for absentee owners, bank loans, bonding companies, potential investors or another third party. A Certified Public Accountant (CPA) can assist in this process. After obtaining the services of a CPA, you and the CPA will make a mutual agreement that outlines the understanding of the service to be performed; compilation, review or audit. Always remember that the financial statements are the responsibility of management, the CPA will assist in presenting the financial information in a format that is understood by the intended users of the financial statements. Each type of service will be accompanied by an Accountant’s Report which will detail the service provided and the responsibilities of management.

Management and the users of the financial statements cannot rely on these services to detect fraud. The financial information presented is the responsibility of management and not the CPA who provides a report.

As mentioned above, there are three types of attest services provide by CPA’s. In the remainder of this article, we will present a comparison of these three services.

A Compilation is the basic level of service a CPA may provide. The CPA is required to obtain an understanding of the industry in which you operate and the principles and practices used in that industry. They will obtain an understanding of how you manage your financial information and, read your financial statements to determine if there are any obvious departures from generally accepted account principles (accounting rules used to prepare financial statements). The Compilation does not provide any assurance on the financial statements. A Compilation is most often used for internal purposes.

In a Review engagement, the CPA performs all the procedures of a compilation but adds additional steps including inquiry and analytical review of the financial data. By understanding the industry and the client, the CPA designs expectations for your company and compares them to your actual results. The CPA inquires of management regarding the principles and practices used in recording the financial information of the business. The CPA is not required to substantiate the information provided by management. A Review provides “limited assurance” that the financial statements are a fair representation of the economic condition of the business. Financial institutions and outside investors may request a Review of your financial information, instead of an audit.

The highest level of assurance that can be given on financial statements is an Audit. An Audit builds on the procedures for a Review by adding an understanding of the internal controls (the checks and balances in place at the organization) management has in place over the procedures used to record financial information. At the start of an Audit, the CPA will assess the risks your company may have when recording financial transactions. The CPA will also substantiate the information provided by management and inspect physical inventory; verify account balances and varies documents including minutes of the board of directors meetings and contracts. Verification is requested from outside creditors, banks and customer on the balances owed to you or payable to them. The report provided by the CPA expresses an “opinion” that the financial statements are fairly presented in accordance with generally accepted accounting principles. Companies registered with the Securities and Exchange Commission are required to have audits, but other third party users may require an audit. These users include banks, insurance and surety companies, potential investors and state agencies the company plans on submitting bids. In the case of not-for-profit agencies, organizations or donors that provide support to the non-profit may require audited financial statements.

The plain vanilla Compilation gathers financial information and presents it in financial statement format. No assurance is placed on the information presented. A Review would be your chocolate flavor which uses analytical procedures and inquiry to provide “limited assurance” that the financial statements are free of material misstatement. Lastly, the cookies and cream of financial reports would be an Audit which obtains an understanding of internal control, assesses risk and verifies various financial information to provide an “opinion” that the financial statements are presented in accordance with generally accepted accounting principles. So what is your flavor? Only you, with the help of your CPA, can decide.