Not all financial statement preparation is the same
Do you know the differences between financial compilations, reviews, and audits? CPAs engage in all three types of financial statement reporting for auto dealerships and other businesses. But each endeavor has its own level of requirements, depth, and outcomes.
It’s important to understand that, depending on the level of assurance selected, CPAs perform procedures of varying degrees of complexity when evaluating a company’s assets, liabilities, revenues, and expenses. Here are descriptions of the three main types of CPA engagements.
Sticking to the Basics
Compilations (or “comps”) rely on data provided by the borrower. As such, the CPA provides no assurance that financial statements are free from material misstatement and conform to GAAP. Instead, the CPA simply reports on management’s financial information in a GAAP financial statement format. Footnote disclosures and cash flow information are optional and are often omitted from comps.
Comps may be appropriate for small or highly profitable dealerships where no outside lender requires a higher level of assurance. Comps also may be desirable for dealers who need assistance organizing their financial data and preparing a financial statement for interested parties such as prospective buyers.
It’s also important to note here that effective for periods ending on or after December 15, 2015, CPAs in public practice may also be engaged to prepare financial statements for a dealership or other company. Similar to a comp, the preparation of financial statements in this manner affords no assurance that the financial statements are free from material misstatement. For more information about this type of service from your CPA, check out SSARS No. 21: Statements on Standards for Accounting and Review Services: Clarification and Recodification published by the American Institute of Certified Public Accountants or get in touch with an adviser at LGT.
Stepping It Up
Next are reviewed financial statements, which provide limited assurance that the statements are free from material misstatement and conform to GAAP. Like comps, reviews are based on internal financial data. Here, the CPA:
- Applies analytical procedures to identify unusual items or trends in the financial statements, and
- Inquires about these anomalies, as well as the company’s accounting policies and procedures.
Reviewed statements must include footnote disclosures and a statement of cash flows. But CPAs aren’t required to evaluate internal controls, verify information with a third party, or physically inspect assets—unless, through their analytics and inquiries, they’re uncomfortable that the numbers are accurate.
Going the Full Nine Yards
An audit provides a reasonable level of assurance that a borrower’s financial statements are free from material misstatement and conform to GAAP. The SEC requires all public companies to have an annual audit. Additionally, privately held dealerships also may require an audit as a part of the lending covenants established within their debt agreements.
Audited financial statements are the only type of report to include an expressed opinion about whether the financial statements are fairly presented in all material respects, in conformity with GAAP (or a special purpose framework).
Beyond the analytical and inquiry steps taken in a review, auditors perform “search and verification” procedures. Among other things, auditors obtain written confirmations for accounts receivable, physically observe year end inventory counts, and randomly test sales transactions by examining contracts and other supporting documents. They also consider the dealership’s internal control over financial reporting and may issue a report on internal control systems along with the audit report.
Although audits provide the highest level of assurance, there are no absolute guarantees against “creative accounting” or inadvertent errors.
Having an audit can provide a dealership with more than a reliable financial statement. Good auditors will share ideas for improving operations that they gathered throughout the audit process. For example, your auditor can help you determine whether a change in inventory accounting methods would be appropriate to help lower your taxes.
Auditors also may share their financial analysis tools. For instance, your auditor may use benchmarks to compare your store’s performance over time and against industry averages. In addition, auditors often use analytics to boost audit efficiency. These metrics can reveal much about your dealership’s strengths and weaknesses.
Making the Decision
A CPA at LGT is ready to discuss with you the purposes you have in preparing your financial statements. Together, you can decide which type of engagement will work best for your dealership. Contact one of our professionals today by sending us an email or giving us a call at (214) 871-7500. Would you rather have your questions answered in person? Join us at our June Controllers’ Roundtable in Galveston, Texas. Register here.
Seek the services of a legal or tax adviser before implementing any ideas contained in this blog.