Sunday, June 24, 2018

Financial Statement Quality

Financial statements may be prepared internally a business or externally by an accountant.  Historical statements that have been prepared by a Certified Public Accountant will explain the level of examination that has been made in a letter preceding the statements.  The levels of CPA-prepared financial statements are:

Compiled: These statements have been put together by a CPA, and, therefore, should be correct with respect to format.  However, the accountant makes no opinion as to the accuracy of the numbers, and the accountant is not required to be independent of the business.

Reviewed: The statements are examined for accuracy by the accountant, but the scope of the examination is significantly smaller that of an audit.

Qualified Audit: In an audit, the accountant strictly examines the financial statements.  Account balances including loans, deposits, receivables, payables, and inventory are audited, and a selection of individual transactions is tested for accuracy.  The auditor also examines the internal controls of the business and expresses an opinion on the ability of the firm to continue as a going-concern.

An audit is considered "qualified" because there is some discrepancy or disagreement between the figures of the business and the auditor's findings.  Any such discrepancies will be explicitly listed in the letter preceding the statements.

Unqualified Audit: This is also a strict examination as described above, except that no discrepancies exist between the business and the auditor.

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