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Herbein Blog

08 Oct
2012

Determine What Type of Financial Statement Your Company Needs

September, 2012 Herbein Energy Advisor
Determine What Type of Financial Statement Your Company Needs 

Aaron M. Shahan – Herbein + Company, Inc.

Many business owners and others do not realize there are three different levels of financial statement reporting – compilation, review or audit. There are a variety of reasons that could influence the level of financial reporting that is used by a company. These reasons could be anything from loan reporting requirements, stockholder preference, absentee owner, potential sale of the business, the personal desire of the owner, etc.

Following is a summary of the different levels of financial reporting.

Compilation Financial Statements
A complied financial statement represents the lowest level of service that can be provided. Compilation financial statements are often prepared for a privately held entity that has no outside requirements for a review or audit. They are primarily used to provide management with a financial tool for managing their business. The minimum requirement is to present financial data provided by management in the form of a financial statement. Financial statement notes and disclosure are not required in a compiled financial statement but may be presented. The outside accountant is not required to be independent of the company or its owner but it must be disclosed if there is not independence. The accountant must still comply with certain basic requirements of professional standards such as obtaining knowledge of the company and the industry it operates in, applicable accounting principles and have a clear understanding with the client as to the type of service that is to be provided.

Review Financial Statements
A reviewed financial statement is the mid-level of financial reporting in that the outside accountant must perform more procedures and provide more assurance than in a compilation but less than an audit. A review is often done to comply with loan requirements or provide additional assurance to outside investors. The outside accountant is required to perform various inquiry and analytical procedures on the entity’s financial data and prepared financial statements. Financial statement notes and disclosures must be presented and the accountant must be independent. One of the requirements of issuing a reviewed financial statement is that the accountant must state that they did not become aware of any material modifications that should be made in order for the statements to be in conformity with accounting principle generally accepted in the United States of America or another comprehensive basis of accounting. This statement provides limited assurance on the financial statements.

Audit Financial Statements
An audited financial statement is the highest level of financial reporting. An audit is often to done to comply with loan requirements, reporting to outside investors or absentee owners, or in anticipation of the sale of the company. The auditor must document and perform substantial pre-audit planning understand and assess the internal control structure, test account balances and underlying accounting records. Audit evidence may include direct correspondence with creditors or customers to verify reported data, physical observation of inventory and counting of quantities, testing the valuation of individual units included in inventory, correspondence with the company’s legal representation and other procedures as deemed appropriate by the auditor. Financial statement notes and disclosures must be presented and the accountant must be independent. The standard audit report states that the audit was conducted in accordance with auditing standards generally accepted in the United States of America and that the financial statements are presented fairly in all material respects in conformity with accounting principles generally accepted in the United States of America. An audit does not provide absolute assurance and management is still responsible for making all management decisions, performing all management functions and for the audited financial statements

For more information visit us on our website at www.herbein.com, or contact the author Aaron M. Shahan at amshahan@herbein.com.

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