Let’s talk formal financial audits, financial reviews, and bases of accounting in the everyday business world:
What is a formal financial audit? Here is the gist – a formal financial audit involves an understanding of a company’s internal controls (possibly testing those controls) and examination of the financial statements leading to an opinion of whether the amounts and other representations of the financial statements are presented fairly and in compliance, in all material respect, with the stated basis of accounting. It is important to note that we as CPAs provide a reasonable assurance in our opinion; never absolute (that is just not practical).
When we think about fortune 500 companies, the big companies on Wall Street, publicly traded companies, etc the typical basis of accounting is based on GAAP – Generally Accepted Accounting Principles. The accrual basis of accounting conforms to GAAP. Put it this way, if you follow the details, rules, guidelines, and standards set forth in the frameworks of GAAP you will in effect be using the accrual basis of financial accounting and reporting. GAAP (accrual accounting) is pretty much like the top-notch, world class, basis of accounting.
However, in the everyday real world, for #entrepreneurs and small business owners, GAAP is often far from the practical, feasible, and economic basis of accounting. Actually, at times, using GAAP may not capture the true representations of the financial statements; it may not capture a true snapshot of the financial position (#BalanceSheet) of the company; it may not capture a true report of the results of operations (#IncomeStatement) of the company.
Cash basis, Tax basis, IFRS basis (International Financial Report Standards), Modified Accrual (used in Governmental Accounting), and others are all examples of OCBOA (Other Comprehensive Basis of Accounting). In the everyday small business world, realistically, the typical basis is more of a hybrid basis. And, in that hybrid mix, the predominant basis is Cash basis.
However, regardless of the basis used, all bases should be consistent, methodical, and reasonable based on standard guidelines, rules, and principles. You can now understand a little better what we as auditors are talking about when we say basis of accounting.
Contact Sanz Virtual Enterprise for help with your next financial auditing engagement for a very affordable price but top notch quality and accuracy.
What is a formal financial review? Here is the gist – a formal financial review is a considerable step down from an audit but it is the next closest thing to an audit. No opinion is given; there is no in depth testing and examination done as with audits. In the end, instead of an opinion, we simply state whether there are any material modifications that should be made for the financial statements to conform to the basis of accounting. Because this is not an audit, we as auditors provide a limited assurance in our review report.
It is also important to note that we as #CPAs are required to be actively licensed and independent in performing both an #audit and a #review. With that said, you as a small business owner must have your financial statements (#financialstatements) already prepared for us to audit or review them. We cannot prepare your financial statements and then turn around and audit or review them. Doing that would absolutely impair our independence with respect to our work. We also cannot be the CEO or CFO of the company we are auditing or reviewing; we cannot have a direct material financial interest (for example, owning 20% of the company) in the company we are auditing or reviewing; all of the above mentioned impairs our independence.
Until next time, check in with us from time to time for more helpful tips to know as a small business owner. #SanzVirtualEnterprise #Forward #SmallBusinessAccounting #SmallBusinessTaxes