November 2019 Boerne Business Monthly Article
written by ADKF’s Courtney Gallagher, CPA
As the holiday shopping season approaches, your shopping list may include presents for your mom, your son, your nephew, and many more. The question is, does it include a present for you?
You have worked hard this year and your business is doing well. Does your success lead you to thoughts of adding new investors, applying for financing to expand your business, or seeking to obtain fundraising for your non-profit? Would you feel more confident if you had a third party looking at your books? If your answer to any of these questions is yes, the best gift you can get yourself is a Certified Public Accounting (CPA) firm that can provide you financial statement services. CPA firms offer a variety of services to assist businesses with financial reporting including compilation, review, and audit engagements.
A compilation is the lowest level of services a CPA can provide. The CPA prepares the financial statements based on accounting records and information provided by you, the client. No test work or analysis is performed on the balances and information provided. The CPA must gain a general understanding of your business, the industry, and the accounting principles your company uses to determine if there are any obvious departures from generally accepted accounting principles. Generally accepted accounting principles are standards and rules that must be followed to prepare financial statements. When preparing a compilation, your CPA may obtain general support for significant account balances such as bank statements, detail schedules of accounts, and aging schedules for accounts receivable and accounts payable. Documents such as operating agreements, loan agreements, and leases may also be obtained for drafting financial statement footnotes. As the financial statements were not reviewed or audited, the CPA does not obtain or provide any assurance that there are no material modifications that should be made to the financial statements.
Maybe the gift you need this year is a review engagement. In a review engagement, the CPA performs inquiry and analytical procedures to obtain limited assurance on the financial statements. The CPA will perform the same procedures as the compilation engagement but will also apply analytical procedures and additional inquiries to determine if your numbers make sense. Inquiry and analytical procedures include comparing prior years balances to the current year, ratio analyses and comparing the client’s company to other companies in the same industry. The CPA forms expectations of your company’s results based on their knowledge of your business and current economic conditions. Then they will inquire of management for any results that are different from those expectations.
Depending on the responses to inquiries by management, the CPA may ask for supporting documentation. When the review engagement is complete, the CPA will issue a report, that includes a conclusion as to whether the CPA is aware of any material modifications that should be made to the financial statements for them to be in accordance with generally accepted accounting principles.
Perhaps you need an audit – the highest level of assurance a CPA can provide. An audit enhances the degree of confidence an intended user can place on your financial statements as the CPA provides reasonable assurance that the financial statements do not contain material errors. In an audit engagement, the CPA performs the same procedures as a review but is also required to obtain an understanding of the business’s internal control (checks and balances in the business’s processes) and assess fraud risk (identify and understand risks to the business and weaknesses in internal controls that would allow fraud or an error to occur). Audit procedures may include confirming balances with outside creditors, banks, donor promises to give, and customers on the balances owed or payable to the business; observing physical inventory; testing selected transactions by examining supporting documents and verifying transactions with board of directors meeting minutes. While accumulating this evidence, the auditor tries to reduce the risk that the financial statements will be materially misstated. When the audit is complete, the CPA provides a report with an auditor’s “opinion” stating whether the financial statements are presented fairly in conformity with generally accepted accounting principles.
You can simplify your shopping options by visiting your CPA and seeing what is in store for your business. Your CPA can advise you of the options that best suit your company’s needs. When it comes time to deliver, you will receive a pretty little package tied with a big, beautiful bow. Open it with confidence, knowing that what you have received is exactly what you wanted!READ MORE