accountant vs. cpa types of financial statements: audited reviewed compiled agreed upon...
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Accountant vs. CPA Types of Financial Statements:
Audited Reviewed Compiled
Agreed Upon Procedures Notes: The Story Behind the Numbers Basis of Accounting:
GAAP Cash Basis Tax Basis
Current Climate
Financial Statements: What You Need to Know
CPA Majored in Accounting 150 credit hours Passed CPA Exam 1 yr experience in CPA Firm 40 hours CPE each year Licensed by the State Board of Accountancy Typically more expensive
Accountant/Bookkeeper No requirements at all
Accountant vs. CPA
Types of Financial Statements
Key: Level of Assurance from Accountant Assurance = Responsibility Responsibility translates to types of “testing”
Compiled Reviewed Audited
Low HighAssurance Level
Audited: Accountant’s Assurance Level: Expression of an
opinion Minimum Requirements for Accountant:
Test financial statements as deemed necessary, to gain reasonable assurance that they are fairly stated in all material respects
Must be independent Statements must include notes Assess controls and report deficiencies
Types of Financial Statements
Audited (cont): Tests Typically Include:
Tests of existence of assets (physical observation) Directly confirming certain assets and liabilities Other testing of account balances Get written representations from attorneys
Types of Financial Statements
Reviewed: Accountant’s Assurance Level: Limited assurance that
no material modifications should be made but still express no opinion
Minimum Requirements for Accountant: Accumulate evidence to support the financial
statements via: Understanding of industry, client, and material
risks Application of analytical procedures to financials Inquiries of management and other personnel
Must be independent Statements must include notes Do not have to assess controls
Types of Financial Statements
Compiled: Accountant’s Assurance Level: None and express no
opinion Minimum Requirements for Accountant:
Present information, consisting of management’s representations, in the form of financial statements
Not required to make inquiries or corroborate information supplied by management unless information is found to be inaccurate, incomplete, or misleading
CAN issue a report if not independent Statements do not have to include notes Do not have to assess controls
Types of Financial Statements
Useful when there are specific concerns the client wants addressed rather than overall financial statement presentation
The CPA performs only those procedures outlined by the client and reports the findings but does not give an opinion
Example: If a potential investor is interested in the collectability of a prospect’s accounts receivable, the investor may engage a CPA to perform procedures to test the accuracy of the receivables aging, such as testing to invoices, confirming balances, etc.
The CPA would report the results of the testing but would provide no assurance as to the collectability.
Agreed-Upon Procedures
Financial Statement Footnotes: As important as the numbers are, often the information
behind the numbers is equally if not more important Some key information required to be included in the
footnotes, as applicable, includes: Key accounting policies such as how revenue is
recognized or how assets are valued (cost vs. fmv) Allowances for uncollectible accounts and obsolete
inventory Potential accruals for uncertain tax positions taken
by the company
Notes: The Story Behind the Numbers
Financial Statement Footnotes (cont): Some key information required to be included in the
footnotes, as applicable, includes (cont): Debt information including:
Terms Collateral Guarantees
Transactions with related parties Lease information including:
Terms Future commitments
Other commitments such as guarantees, purchase agreements, profit sharing plans, owner buy/sell agreements, etc.
Notes: The Story Behind the Numbers
Financial Statement Footnotes (cont): Some key information required to be included in the
footnotes, as applicable, includes (cont): Any contingent liabilities such as outstanding law
suits Any events subsequent to the reporting period that
may impact the financials
Notes: The Story Behind the Numbers
GAAP (Generally Accepted Accounting Principles): Also referred to as accrual basis Key Standards:
Revenue recognition – Recognized when a good/service has been passed on to the customer
Expenses – Recognized when a good/service has been received
Inventory – Reported at the lower of cost or market value
Fixed Assets – Recognized at cost and depreciated over the useful life of the asset
Investments – Reported at fair market value Bad Debts – Recognized when collectability is
questionable
Basis of Accounting
Cash Basis: Pure Cash Basis (rarely used) – revenue and expenses
are recognized when cash is received or disbursed. Balance sheet would only include cash and equity.
Modified Cash Basis (used more frequently) – allows the following exceptions to the Pure Cash Basis: Property and equipment are recognized as assets
and depreciated Debt is recognized and amortized Accruals for employee withholding not paid but
relate to compensation paid
Basis of Accounting
Tax Basis: Basis of accounting that is substantially identical to
what is reported on the tax return Key Standards:
Can be either cash or accrual basis – which drives when revenue and expenses are recognized
Fixed assets - Depreciated using IRS prescribed lives and methods
Also could use accelerated incentives such as section 179 and bonus depreciation
Investments - Stated at cost and no unrealized gains/losses are run through the income statement
Bad debts – Recognized when collection is no longer pursued
Basis of Accounting
Banking World Typically in the non-public, for-profit sector, banks
dictate the types of financial statements in their debt agreements.
We are seeing more and more banks tighten the screws to these agreements in requiring GAAP basis financials that have been either reviewed or audited depending on the debt level and perceived risk.
This has been a trend since the banking crisis 5 or so years ago. The banks are more conscious of the completeness of their files and are imposing more restrictive covenants.
Current Climate
Accounting World Convergence with International Standards
Key differences: Revenue recognition, fair market valuation, lease presentation, and inventory valuation
No decision expected in near future Private vs. Public Standards
There is currently a push for separate reporting standards for privately held companies
No current time-table on decisions
Current Climate
Contact Information:
James B. Mersman, CPA – Partner
Dolinka, VanNoord & Company PLLP360 E. Beltline NE, STE 200Grand Rapids, MI 49506
(616) 459-2233
Thank You