Financial Statement Preparations, Compilations, Reviews, and Audits
Timely, accurate and understandable financial statements are necessary to gauge how well your business has performed and to assess the strength of its financial position. Reliable and timely financial statements are the foundation upon which you make important business decisions.
You can prepare your financial statements in house, but if you’re like many small business owners, you may prefer to have an outside professional prepare your financial statements in accordance with an accounting framework that is appropriate for your business.
Oftentimes, the certified public accountant (CPA) who performs your general accounting and/or bookkeeping and prepares your annual tax return can also prepare your financial statements and, in addition, perform the appropriate service in order to meet your bank’s requirements. Keep in mind that not all accountants are CPAs. In most states, only a licensed CPA can perform certain services.
Basic Financial Statement Preparation
If you decide to have AB WATERS prepare your financial statements, we can do so in any frequency that is most useful for you. Typically, this service is performed in conjunction with bookkeeping or transaction processing services and can be monthly, quarterly or annually. The financial statements are prepared in accordance with an acceptable financial reporting framework. If you’re not sure which reporting framework to use, we can explain the pros and cons of each and the best fit for your business.
The financial statement preparation service is primarily intended for your own use to have current information on the financial standing of your business and to make decisions accordingly. In essence, this service is no different from what an in-house controller or CFO would provide to management in a larger company. You can share your financial statements with outside parties but on each page, we will include a notice that “no assurance is provided” on the financial statements.
Because AB Waters will prepare your financial statements directly from the records you provide, we will
not verify the accuracy or completeness of the information and we are not required to issue a formal report on the financial statements. However, the preparation may fulfill some lender’s documentation requirements for small loans and may meet a lender’s loan covenant requirements.
Compilation
Compilation of financial statements is a service where AB WATERS’ role is more apparent to outside parties, and as such, the requirements for performing this service are more explicit. For example, if we are not independent from ownership, management and other circumstances in our relationship to you and your business, we are required to disclose the impairment of independence in our compilation report. The compilation report is the first page before the actual financial statements and is written by us on our firm’s letterhead.
AB WATERS is also required to read the financial statements in light of the financial reporting framework being used and consider whether the financial statements appear appropriate in form and are free from obvious material misstatements.
However, we do not obtain any assurance for a compilation because we are not required to verify the accuracy or completeness of the information provided or otherwise gather evidence for the purposes of expressing an audit opinion or a review conclusion.
The compilation report states that we did not audit or review the financial statements and accordingly do not express an opinion, a conclusion or provide any assurance on them.
A compilation is typically appropriate when initial or lower amounts of financing or credit are sought or there is significant collateral in place. Though no assurance is provided, outside parties may appreciate your association with a CPA, which is readily apparent in the formal compilation report.
Review
The review service is one in which the CPA performs analytical procedures, inquiries and other procedures to obtain “limited assurance” on the financial statements and is intended to provide a user with a level of comfort on their accuracy. The review is the base level of CPA assurance services.
Similar to a compilation, we are required to determine whether we are truly independent. If we determine that we are not independent, we cannot perform the review engagement.
In a review engagement, we are required to understand the industry in which you operate — including the accounting principles and practices generally used in the industry. We are also required to obtain knowledge about you — including your business and the accounting principles and practices that you use — sufficient to identify areas in the financial statements where it is more likely that material misstatements may arise.
A review is substantially narrower in scope than an audit. A review does not contemplate obtaining an understanding of your business’s internal control; assessing fraud risk; testing accounting records through inspection, observation, outside confirmation or the examination of source documents or other procedures ordinarily performed in an audit.
In a review engagement, we will issue a formal report that includes a conclusion as to whether, based on the review, we are aware of any material modifications that should be made to the financial statements in order for them to be in accordance with the applicable financial reporting framework.
A review typically is appropriate as a business grows and is seeking larger and more complex levels of financing and credit. It is also useful when you, as the business owner, are seeking greater confidence in your financial statements for the purpose of evaluating results and making key business decisions.
Audit
The audit is the highest level of assurance service that a CPA performs and is intended to provide a user comfort on the accuracy of the financial statements. The CPA performs procedures in order to obtain “reasonable assurance” (defined as a high but not absolute level of assurance) about whether the financial statements are free from material misstatement.
In an audit, we are required to obtain an understanding of your business’s internal control and assess fraud risk. We are also required to corroborate the amounts and disclosures included in your financial statements by obtaining audit evidence through inquiry, physical inspection, observation, third-party confirmations, examination, analytical procedures and other procedures.
When performing an audit engagement, we are required to determine whether our independence has been impaired. Similar to a review, if our independence has been impaired, we cannot perform the audit engagement.
We will issue a formal report that expresses an opinion on whether the financial statements are presented fairly, in all material aspects, in accordance with the applicable financial reporting framework. In addition, we are required to report to you any significant or material weaknesses in your system of internal control that are identified during the audit. By becoming aware of internal control weaknesses and discussing these with we us, you might be able to improve the way you do business.
As the highest level of assurance, an audit typically is appropriate and often required when you’re seeking complex or high levels of financing and credit. An audit also is appropriate if you’re seeking outside investors or preparing to sell or merge with another business.
Contact AB Waters to discuss the level of assurance you require.
