Edmonton Accountant | Auditing Financial Statements

hi, thanks for tuning in for another episode of ask Edmonton Accountant. I’m Josh and I’m here with uh, try again because he’s the only one who’s here on a Saturday with me. So he’s roped into the video again with me today. So thanks y’all. Way for, for, for coming out. And what are we learning about these business owners working on Saturday? Well, a lot of them are definitely more available so they’re more receptive to having the meeting times on the weekends and I’m not having that business mindset or with the operation that they don’t that they normally have during the week days. So today what we’re talking about our audit or review engagements, are they necessary? Are these actually necessary? Edmonton Accountant we’ll go back to the old Warren Buffett quote. Accounting is the language of business and these statements are, you know, the language, these are the books that we’re producing.

So, and the statistic is 29 percent of entrepreneurs who fail, they report, they run out of cash is a significant cause and you know, running out of cash is just understanding those numbers and those numbers take the form of your financial statements and the story that we get, you know, business owners, they come in and they think they need a review or audit, but they don’t know why. Um, and so what are the questions do you think these business owners should be asking if they think they need to review or audit? Well, one, Edmonton Accountant, can you summarize the difference between the notice to reader financial statements, reviewed financial statements and an audited financial statements? Yeah, I guess that’s a good place to start is what’s the difference between the wall? So the three of their financial statements is kind of the, the lowest level of assurance.

Edmonton Accountant, and what that means is the CPA is the professional obligation for the CPAS. First of all, is this a material? Is it arithmetically? Correct. There’s the balance sheet balance that the income state flow into the retained earnings, retained earnings low into the balance sheet. You know, is it arithmetically correct. I’m not that it’s been tested, but just the statement itself is arithmetically correct. Then is a statement plausible? So is it believable, not quite reasonable, reasonable is different, a little higher threshold for reasonable, but is it plausible? Is this believable based on the industry, the size of this business? You know, is this actually a attainable? So arithmetically correct and plausible that are reviewed. Financial statement is we’re testing the reason abilities, we’re using analysis and determining are these statements actually reasonable and for that we actually have to do some testing to determine if they are reasonable and on the far end we have the audits that you know, effectively usually involve confirmations of balances, you know, have we actually confirmed the balance with the bank. We have confirmed the receivables with the people who actually owed that money and tested that money has come in a subsequent to the year and so on one end we have the notice to reader is a plausible on the in the middle where you have the reboot engagements, is it reasonable? And the other far end is the audited financial statements. Hasn’t been confirmed. Okay,

well, Edmonton Accountant, when you are completing a reviewed or audited financial statements, who is your main fiduciary duty?

So that’s, you know, one of the, probably a misconception as bizarre as well, they get a review or audit and it’s better really when we’re doing a review or an audit, we’re actually normally doing it for external users. So we’re not doing it for the business owner, we’re doing it, you know, for the bank or, or whoever is lending the money, uh, we’re doing it. And if the not for profit, we’re doing it for the, the members. So the fiduciary duty is the main fiduciary duty anyways. We still have a fiduciary duty to the client, but the main fiduciary duty is usually the person who’s putting the biggest reliance on that. Edmonton Accountant that’s someone who’s lead someone to a lot of money and they want to make sure that those statements are in fact correct. So in effect, it takes us away from working from the business owner to working for the bank.

So, Edmonton Accountant, if a notice to reader statements allow you to focus on the client, why would anyone choose an audit or review?

Um, a lot of times they choose an audit or review is well because they think they need to, but generally the main reason of why they actually need to is they actually need to borrow money and a significant sum of money and that person who is lending the money, you know, wants an impartial third party to make sure that the financial statements are reasonable. So in this case, you know, the, the accounting firm has determined that the statements prepared by the business owner a had they reviewed those statements and that they are in fact reasonable then then the financial institution can rely on them to lend money. Awesome. So, Edmonton Accountant, when are reviewed or audited statements generally necessary? Yeah. So it really goes

a large loans we’re talking about, you know, if the business needs to raise a significant amount of capital, that level of significance is usually a completely underestimated for, for business owners that, you know, in terms of audits in private companies, you know, we’re talking, you know, a, a large private companies freight, uh, sometimes not for profits do need audits to their members. Edmonton Accountant, so sometimes not for profits will need audited financial statements. But for most small businesses it’s a notice to reader financial statements or reviewed, um, with, uh, an audited for select not for profit.

Okay. So you mentioned loans. What size of loans have a, have you seen issued based on the notice reader statements?

Yeah, great question. We will say, well, I need significant amount of any significant money I need, you know, 200, 300, 400, 500,000 right business, I need a million dollars from a business where I need to review, I need an audit. We see today we see $10,000,000 loans coming off and notice to reader statements. So people think that, Edmonton Accountant, I need financing, so I need a review a, is it more than 10 million that we’re looking for, is that the type of business we’re doing or you know, if not, we should be seeing is a notice to reader acceptable because lots of times there’s the ability to loan up to $10,000,000 in various circumstances with a notice three to statement, which has changed a lot and that wasn’t always the case. But these days, you know, that’s, that’s the case. Edmonton Accountant we can often shouldn’t say often, but you know, we’d seen loans up to $10,000,000 with number three to financial statements. So we really have to question do we actually need those?

Right. Well as banks have been relaxing their positions on the lending to business based on notice, read your financial statements, is it common for a business owner to think they still need one? When they don’t,

they get locked into it. So, you know, they had a, a policy that was in place five years ago where they had a big mortgage on the, the, the, you know, the office that they built. They built a shop or they acquired some commercial space for the business and, and when they loan that money, when they borrowed that money five years ago, they said, yeah, you need a review engagement and now people think they still need to review engagement, but the banks have just changed their rules. So often they come in thinking that they do need them because they were told they need them correctly. So at one time. But that has changed now. Edmonton Accountant, so that issue a lot of times needs to be revisited. It hasn’t been revisited in a couple of years because the banks have drastically changed their stance on it.

That issue. Okay. Well, when you see clients, a bank’s asking for review engagement and you think the bank’s request to have the statements reviewed is reasonable. What do you do?

So, I mean, if we, if we think it’s, it’s, you know, if it’s reasonable, Edmonton Accountant, you know, we’re, we’re going to leave it, but if you think it’s not reasonable, you know, we’re going to inquire with the bank or sometimes a bank themselves just haven’t looked at it. Right. They just haven’t updated the paperwork, so sometimes we have to challenge them a little bit like, come on guys, is this really reasonable here we’re talking about a $500,000 loan. Do we need to review statements? We have another file with you guys and it doesn’t need a root statements at this level. So what’s different about this business? So sometimes it takes a little bit of prodding. Edmonton Accountant, you don’t have to point out areas of inconsistency. People don’t like to be inconsistent, so a, lots of times that’ll bring them back in line, but sometimes they just haven’t reviewed the paperwork sense in all. It’s a longterm loan number, 10 year term, 25 year mortgage. You just haven’t looked at it again. So it’s simply by just bringing it to their attention, um, you know, that can, you know, reduce that requirement and get the bank to put it in to notice reading your financial statements that are, are less cumbersome for the business owner. So.

Okay, well, can you explain what getting reviewed or audited statements is becoming counterproductive for small businesses who want financing? Yeah, it’s actually keep

coming like full circle. So um, or before if you had reviewed it’s better for financing and now we’re not just saying that reviewed is a known as three or reviewed or the same if you need, you know, if you don’t need a significant sum of money, you know, if you’re looking at less than $10,000,000 or certainly less than a million dollars, sometimes it’s actually the customer is actually worse off by having a reviewed statement and I’ll explain why is because the bank, although they don’t want reviewed or audited statements, they’re good with antiar. Sometimes they’re no longer good with just annual. They want quality interim reports generated by the client and sometimes the quality that they’re, they’re asking for, even though they’re okay with saying draft, they want to make sure that, that it, it really is quality statements. Edmonton Accountant They’re going to query any numbers that are unusual and the clients aren’t able to do this themselves.

Edmonton Accountant the problem is if the accountant is supposed to be doing a review or an audit, we’re, our hands are Kinda tied into how much work we can do in terms of interim statements because you can’t help prepare interim statements and then turn around and objectively review the interim statements that you helped prepare. Um, we have to be objective in that state’s stance. So sometimes it’s actually counterproductive to have your CPA preparing or viewed statements because they’re not going to be available for the to help you with quality in terms statements which are quickly becoming the threshold for the loan. The bank’s not concerned about what happened last year. They want to know what’s happened up to the minute we write you this check in because you could have encountered significant difficulties in the six months between the year end or the year between the year end, so. Right. Okay. So that small business, why audits often counterproductive for a small not for profit?

Yeah. It’s just the sheer scope of them. Like, you know, when we see audited financial statements as a starting point in a lot of firms, you know, $10,000 to do audited financial statements and we’re talking about it and not for profit that, you know, as you know, $200,000, 100,000 or less in revenue and if $10,000 of the, you know, that harder and donations are going out in the form of audited financial statements, what are we truly protecting here? Right? Edmonton Accountant, you know, so when we started having to look at the scope of the audit, it might sound better, you know, is it worth dispersing 10 percent of the entire revenue and the charity to do an audit, I would already know that we to have, you know, enough meat on the bone that the audit is actually providing some benefit to the members and the charity as a whole.

Right? Edmonton Accountant, so I look at the scope and the percentage of the operations, I would caution any, any charity with less than $250,000. You’ve really got to start to question, do we really need this audit? So if you do absolutely need the review or an audit, why should you do to make sure you still get professional advice for someone without independence concerns. So often the, the power move to do for clients is to have two CPA’s involved. So let’s say you really do need to review, there’s no way around it. Maybe you’re a construction company and you’re bonding organization needs a reviewed financial statement, but at the same time that your finances are still wants quality interim statements, um, lots of times it ends up with two CPAS on board. So you’ll have one CPA firm who’s helping you with the internal reporting and another CPA firm who can, uh, you know, do the review or sometimes put the proverbial rubber stamp on it at the end of the year to make sure the one CPA was, Edmonton Accountant, you know, on track with the numbers.

So, um, by segregating it, although it sounds like why would I ever do to Cpas, you get the best of both worlds and you have that independence at the year end. And at the same time, you still have quality representation representation throughout the year, so you’re not relying on undesignated staff during the year to prepare those interims. And really it’s those interims that are really driving the business decisions, you know, people aren’t waiting to the end of the year to, you know, hire new staff or laying people off or buy equipment. They’re using that interim to make statements. The only one is really using the, the year end audit and statements, you know, in the example I just gave it to be the bonding company or the bank who is lending the money. So, um, yeah, so Edmonton Accountant, you know, the probably best case scenario is having two firms doing that. If it’s at enough of escape the scale that it’s worth it, if not, you know, can we make, do with these notice to reader statements and have one CPA firm help with everything that they need. So I think that’s, Edmonton Accountant, that’s all we have here today. So thanks again for tuning in. And as always, if you have any, uh, any questions, feel free to leave them in the comments below and we’ll try to address anything in a future upcoming video. Thanks very much.