During this summer of 2023, it seems the marketplace has had a tremendous demand for financial statement reviews. Only a CPA has met the professional and legal requirements to complete a review of financial statements and provide an official accountant’s review report.
Some of the financial statement reviews we are currently working on at Simpson & Simpson Accounting include:
- A start-up corporation needing a review completed to receive funding from a company that invests in start-ups.
- A non-profit needing a financial statement review completed to gain funding from a foundation.
- A construction company that was required to have a review completed to verify that the company is meeting their debt covenants (Meaning that the business is performing well financially and has the cash flow to pay all their debts).
One of the most important things we request from a client needing a financial statement review is the precise review requirements verbiage from the organization that will be giving the funds or loan to our client.
The terms “Review” and “Audit” are often used incorrectly or mistakenly switched. I have seen a situation where a funding company is requesting a review, but when I read the requirements, it goes beyond a review and should have been called an audit or agreed-upon procedure. I’ve also seen where a non-profit officer was 100% sure they needed a review but then once submitted, they were mistaken and were required to have an audit completed, instead. Not a fun conversation to have after the fact. This is why it’s always beneficial to “measure twice, and cut once”.
To initiate an audit or financial review request, verify and obtain from the funding source in writing exactly what review or audit requirements are being requested. Send this wording to our CPA firm if you would like our analysis and a price quote. A financial statement audit is 10 times more work than a financial statement review and 10 times more expensive in CPA firm fees.
Companies that are required to have a financial statement review completed are typically start-ups with up to approximately $5 – $10 million in annual sales or similar amounts in donations for a non-profit. Companies needing a financial statement audit are usually much bigger, $20 million in annual sales, $50 million in annual sales, and up from there. Companies that have publicly traded stocks are required to have a financial statement audit completed every year.
I have seen some cases where much smaller companies or non-profits requested a financial statement audit. But as mentioned before, they usually have no idea the huge amount of work involved. Even a financial statement audit for a Company with about $1 million in annual sales will take 40 hours to complete all the audit procedures required. The majority of time spent in a financial statement audit is used to test accounting transaction samples. For example, getting an Excel detail of all sales transactions for the year, randomly choosing 25 sales transactions, and then testing each individual sales transaction to verify the sale is real, at the correct amount, and in the correct recorded period. This would involve the accountant obtaining the sales contract, evidence the customer agreed to the sale, the invoice, and then obtaining evidence of the payment for that particular sales transaction.
The main objective of a financial statement review is for the accountant to obtain limited assurance that there are no material modifications that need to be made to the entity’s financial statements. Pretty vague to the non-accountant speaker, right?
A review consists of management inquiries and analytical procedures, but often when I review the financial statements, the review really starts with me quickly finding all the income statement & balance sheet accounts that do not make sense, or appear to be recorded in an incorrect way. I can quickly see when general ledger accounts are improperly being used or misnamed, assets or liabilities have balances going in the wrong direction, there are undeposited funds (Common QuickBooks Online issue), or bank reconciliations have never been completed (meaning there is a good chance of missing accounting transactions or duplicate transactions)
Companies under $5 million in annual sales often do not have a full-time accountant as it would be too expensive. That is why we serve as the accounting team, tax team, and CFO for a fraction of the price of a full-time accountant.
If your business needs help with a financial statement review or financial statement audit, please feel free to set up a free 30-minute consultation. And remember to get the review/audit requirements in writing straight from the funding group/government agency. Measure twice, cut once!
- THE VETERAN CPA –