Compiled, reviewed or audited financial statements

Almost every organization — whether it’s a privately held business, a publicly owned corporation, or a nonprofit organization — must prepare reports on its financial performance. Such reports help owners and managers make operating decisions, enable creditors to evaluate loan applications, and provide individuals with information to make investment decisions.

The accounting profession recognizes that different entities have different accounting needs. Acknowledging these differences, the profession has developed standards that enable CPAs and Scholl, Chyo & Company to offer a range of financial statement services.

Scholl, Chyo & Company may provide a client with three distinct services involving financial statements. Each is designed to meet a different need.

A compilation is useful to small, privately held entities that need help in preparing their financial statements. A review, on the other hand, may be adequate for entities that must report their financial positions to third parties, such as creditors or regulatory agencies. Reviewed financial statements may also be useful to business owners who are not actively involved in managing their companies.

An audit is the third and most extensive service. An audit is appropriate for entities that must offer a higher level of assurance to outside parties. An unqualified opinion from a CPA after an audit provides reasonable assurance to outside parties that the entity's financial statements fairly present its financial position and results of operation in accordance with certain accounting principles.

Compilation, review, and audit engagements are explained in greater detail on the following pages.

Through compilation services, Scholl, Chyo & Company prepares monthly, quarterly, or annual financial statements. However, we offer no assurances as to whether material, or significant, changes are necessary for the statements to be in conformity with generally accepted accounting principles, the cash basis, or the income tax basis of accounting. During a compilation, the data is simply arranged into conventional financial statement form. No probing is conducted beneath the surface unless we become aware that the data provided is in error or is incomplete.

However, before agreeing to perform a compilation, we will take a "common sense" look at the entity to decide whether the client needs other accounting services, such as help in adjusting the accounting records.

Scholl, Chyo & Company becomes familiar with the accounting principles and practices common to the client’s industry, and acquires a general understanding of the client’s transactions and how they are recorded.

After compiling the financial statements, Scholl, Chyo & Company is obliged to read them and consider whether they are appropriate in form and free from obvious material errors. Scholl, Chyo & Company then issues a standard report that says, in effect, that the financial statements were compiled, but because they were not audited or reviewed, no opinion is expressed.

Compilation standards permit us to compile financial statements that omit footnote disclosures required by generally accepted accounting principles or another comprehensive basis of accounting (cash or income tax). This is allowable as long as the omission is clearly indicated in the report and there is no intent to mislead users. However, when footnote disclosures have been left out, Scholl, Chyo & Company adds a paragraph to the compilation report stating that management has elected to omit disclosures. This paragraph lets the user know that if the financial statements contained this information, it might affect the user’s conclusions.

A compilation is sufficient for many private companies. However, if a business needs to provide some degree of assurance that its financial statements are reliable, it may be necessary to engage Scholl, Chyo & Company to perform a review or an audit.

A private entity may engage Scholl, Chyo & Company to perform a review of its financial statements and issue a report that provides limited assurance that material changes to the financial statements are not necessary. With respect to reliability and assurance, a review falls between a compilation, which provides no assurance, and the more extensive assurance of an audit.

Before a review, Scholl, Chyo & Company may have to compile the financial statements; however, in all cases, the financial statements are management’s statements, not Scholl, Chyo & Company’s. Management must have a sufficient understanding of the financial statements to assume responsibility for them.

Two other factors differentiate a review from a compilation — Scholl, Chyo & Company must remain independent of the client during a review, and all appropriate footnotes must be included in the reviewed statements.

Scholl, Chyo & Company obtains a working knowledge of the industry in which the entity operates and acquires information on key aspects of the organization, including operating methods, products and services, and material transactions with related parties.

Scholl, Chyo & Company will then make inquiries concerning such financial statement-related matters as accounting principles and practices, record keeping practices, accounting policies, actions of the board of directors, and changes in business activities. Then Scholl, Chyo & Company will apply analytical procedures designed to identify unusual items or trends in the financial statements that may need explanation. Essentially, a review is designed to see whether the financial statements "make sense" without applying audit-type tests.

Keep in mind that during a review, Scholl, Chyo & Company does not confirm balances with banks or creditors, observe inventory counting, or test selected transactions by examining supporting documents. However, in many instances, a review—with its limited assurance —may be adequate for a business or its creditors. If more assurance is necessary, the organization may need to engage Scholl, Chyo & Company to perform an audit.

A private company may engage Scholl, Chyo & Company to audit its financial statements and to issue a report that provides the highest level of assurance that the financial statements are presented fairly in conformity with generally accepted accounting principles.

In an audit, as in a review, Scholl, Chyo & Company must be independent of the client and the financial statements must contain all required footnotes.

To gather evidence on the reliability of the financial statements, Scholl, Chyo & Company performs "search and verification" procedures. In an audit, Scholl, Chyo & Company generally confirms balances with banks or creditors, observes inventory counting, and tests selected transactions by examining supporting documents. In addition, Scholl, Chyo & Company contacts sources outside the client organization to gather information that may be more objective than that obtained from internal sources. For example, Scholl, Chyo & Company usually obtains written confirmation from a client’s customers about amounts owed to the client at a specific date. By accumulating this type of evidence, Scholl, Chyo & Company tries to reduce the risk that the financial statements will be materially misstated.

We then issue a report stating that the financial statements are presented fairly, in all material respects, in conformity with generally accepted accounting principles.

An audit is planned and performed with an attitude of professional skepticism; that is, the auditor designs the audit to provide "reasonable assurance" that material errors or fraud are detected. However, fraud concealed through forgery or collusion may not be found because the auditor is not necessarily trained to catch forgeries, nor will customary audit procedures detect all conspiracies.

An audit provides a reasonable level of assurance that the financial statements are free of material errors and fraud. An audit does not, however, provide a guarantee of absolute assurance.

What Services Do You Need?

Compilation
Scholl, Chyo & Company prepares financial statements from information provided by management. A compilation is useful when limited in-house capabilities for preparing financial statements exist.

Review
Scholl, Chyo & Company applies inquiry and analytical procedures to financial statements provided by management to determine if they are reasonable. A review provides limited assurance that no material changes need to be made to the financial statements.

Audit
Scholl, Chyo & Company examines financial statements by conferring with outside parties, completing physical inspections and observations, and testing selected transactions by examining supporting documents. An audit provides the highest level of assurance that the financial statements fairly represent the entity's financial position and results of operation in accordance with generally accepted accounting principles.

FREE Consultation & FREE Business Health Test

Learn for yourself, with absolutely no obligation, how Scholl, Chyo & Company can help you and your business prosper. We offer a free initial consultation, at your office or ours, covering the topics that matter most to you. We'll even use your current financial statements to perform a no-charge Business Health Test and provide you with a written report about your particular situation.

No Surprises

Nobody likes unpleasant billing surprises from their professional advisors. That is why, for many projects and ongoing work, you will be quoted a flat, all-inclusive, fee for our services.

Our Guarantee

If, for any reason, you are not satisfied with the quality of our service you will pay nothing for that service. You are the final judge!

Are you ready to experience a new and profitable approach to your accounting and business processes? Give us a call at 831-758-5966, 800-747-5967 or email info@schollcpa.com   for your free consultation and Business Health Test.

Bret Scholl, CPA, Certified Public Accountant, QuickBooks Certified Pro Advisor, tax preparation, QuickBooks training, QuickBooks classes, accounting, bookkeeping, outsourced bookkeeping, Scholl, Chyo & Company, Bridge21, Bridge 21, Valuestar, Forensic Accountant, audit, tax returns, tax tips, financing, financial planning

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