Edmonton Accountant | Financial Statements

Hi and welcome to another edition of aspherical CPA. Uh, today we’re talking about notice three, their financial statements are NTR financial statements. Um, and I have your way here with me again. Uh, thanks for. Thanks for joining me on the video. So, uh, yeah, tell me about your job. How long have you been here again? Uh, I’ve been here for two years. Two years. And you’re getting started with the CPA program in January, January 26th. I’ll be in the program. Pep, excited, scared. Both generally expect like a dryer assess. You just take it over and over until you pass. So, Edmonton Accountant, so the quote is, uh, you know, Warren Buffet says accounting is the language of business. So accounting is the language of business and I think if Warren Buffet’s willing to say that, I think he’s a pretty smart guy, maybe we should listen to them. So, and the statistic that we have, you know, 25, 29 percent of entrepreneurs who fail, you know, they were running a cash is, is the problem.

So the gentleman just don’t know their numbers. So the, the story that comes to mind is business owners, they come in to see us and they don’t have any numbers or their numbers are inaccurate or they don’t know how to read the numbers. So I’m pretty much all three are, all three are just as bad really. So these entrepreneurs, you know, what should they be asking? Well first of all, they need to ask what are the notice to reader or NTR financial statements. So the notice to reader or NTR financial statements, these are the annual financial statements of the business. So Edmonton Accountant generally you’re going to have a income statement statement of retained earnings and a balance sheet and the, the formal annual statement. So for the whole fiscal year of the business of what happened in terms of profit and loss, what’s the assets and liabilities of the corporation and what are the earnings that have been saved in the corporation over time?

Right? So what is the accountants’ professional obligation when it comes to notice to reader financial statements? So the accountants obligation as CPAS obligation when it comes to notice to reader financial statements, they’re different for different types of financial statements, but when it comes to end, he, our financial statements, the CPAS required to make sure that the numbers are arithmetically correct. So the balance sheet balances, uh, you know, the Aecom state than it actually is calculated correctly and that the numbers are plausible. So again, the numbers are arithmetically correct. And the numbers are plausible. Awesome. Well, Edmonton Accountant can you give an example of how that differs from reviewed or audited financial statements? We’re, we’ll start with reviewed financial statements. So reviewed financial statements are a little bit different so we have to go beyond, you know, just determining that the numbers of arithmetically correct and that are plausible.

Whereas in reviewed statements, we have to perform analysis to ensure that the financial statements are reasonable. You know, we calculated some ratios have we calculated versus what happens in the prior year. So we’re going a step beyond, um, you know, and just making sure it’s, it’s arithmetically incorrect and believable essentially. And now we’re testing a using analysis to make sure that the numbers are reasonable in reviewing financial statements. Whereas on the other end of the spectrum, we have audited financial statements. So we started here with notice to reader making sure that the plausible in the middle we have reviewed, making sure the numbers, you know, we’ve done some analysis determining the reasonable and audit where generally we’re doing a lot of confirmation techniques to confirm that the balances are correct. Such as, you know, confirming with the bank that, that is the number, Edmonton Accountant, you know, sending out her confirmation, a confirmation forms to the receivables to make sure that they are in fact outstanding and they’re going to be paid.

So we go from, you know, believable to test as reasonable to confirm in terms of audited. Well, given that, what would be the advantage to do a NTR financial statements? Cost cost is the main event. It’s much cheaper for a small business owner should do notice through your financial statements as opposed to audited financial statements. And the costs for audited financial statements that have risen pretty dramatically in the last 20 years, uh, were audited, reviewed or audited, was more of the standard. And now the standard is creeping up. That notice to reader is kind of the standard for most owner managed businesses for most small businesses, most private companies. It’s a notice to reader notice through your known as the readers were reviewed and audited or more for big companies or not for profits these days. Right. Edmonton Accountant, well, besides cost, are there any other advantages to an NTR financial statements?

Um, some of the advantages are, is that the accountant is a, the accountants, the independence concerns. So the accountant can actually be more involved. So when you’re doing reviewed or audited financial statements, the accountant has to maintain a certain level of independence because in, for, in all practicality, they work for a third party and you will, as a, as an auditor, you’re working for the bank to make sure the financial statements of the business are recorded correctly. But when it comes to the three to financial statements, you know, the independence requirements aren’t quite as high a, so it allows the, Edmonton Accountant, it allows the accountant to get more involved in terms of providing advice to the business owner. Okay. Well, given that there is more due diligence on reviewed and audited financial statements, do you think that the additional costs would benefit the business owner in the long run then?

I don’t think so. I think for most small businesses there are better things for them to spend their money on in terms of reviewed or audited financial statements. Edmonton Accountant in terms of, you know, if you really wanted to invest in your county, you know, you should be more concerned about, you know, developing the internal reporting requirements of your business. You can only get to the year end financial statements to a certain level of, of a competency. But the end of the day, most financial decisions can’t wait until the year end. You know, we have to decide can we hire people, did we have to lay people off? Can we afford to buy new equipment? You know, we got to make those numb, we got to make those decisions during the year, so let’s invest rather than investing to make the, the year end financial statements a greater degree of perfection, let’s get some real reliable numbers flowing through the business during the year that we can make good reliable decisions.

I think that will be the, the better spend for most small business owners rather than investing in a, in an unnecessary year end a preparation procedure. You know, the NTR is good enough if a, you know, we have a additional dollars to go further. Let’s make our internal reporting requirements stronger. Okay. Well are there any limitations with annual financial statements in general? Yeah, it’s just that, that they are annual financial statements and given the tax reporting deadlines, I mean your year end is due six months after the last day of your fiscal year. So if you have a December 31st fiscal year, that year end is actually do a corporate tax return is due at the end of June. So now when we’re meeting with a client, you know, potentially we could be meeting in June on last year’s numbers, some of those numbers, those numbers took, you know, Edmonton Accountant from January first 2018 to December 30, first 2018 and now we’re meeting with them in June of 2019.

Some of those numbers date all the way back to January like they’re 18 months old. So, you know, we’re, we have numbers in front of us, although the we can, you know, be accurate and, and, uh, you know, um, be free of any material misstatements. They’re still 18 months old that the company could have fallen off a cliff or it could have gone to the moon in Edmonton Accountant in the time that the year I happens and we’re meeting on the year end numbers. So they are just that their year end numbers, but they’re not necessarily up to date numbers. That’s great. Um, well when do you think business owners should spend their accounting dollars instead of doing reviews or on it? Yeah, so I, I, I, I think they should be spending it in, you know, increasing the interim reporting standards. So what do we have in between the year ends, what’s our reporting centers, how can we get reliable income statements, balance sheets, cash flow statements throughout the year so we can make business decisions rather than wasting a whole lot of money in doing more than what’s necessary on the annual end.

Right. Well, can you explain how independence requirements can make it difficult to give advice throughout the year? One of the, the things that you do with reviews and audits as you’re analyzing the controls that are put in place in the company, um, so when you’re analyzing the controls that you’re putting in place in the company, you can’t be the one putting the controls in place in the company. So you’re now you’re charging the client to put it in the interim controls. So what’s the reporting requirements leading up to the year end as opposed to being the accountant. You could actually help them implement those processes and controls to get reliable, inter, bigger. So Edmonton Accountant it really limits what you can do for the client and getting them reliable interim figures when you’re the one supposed to be objective from the outside just to analyze the numbers and the controls that were in place to provide those numbers.

Right. Well, given you’re a CPA, our notice to read their financial statements from non CPAS reliable, it’s the flip of a coin. So sometimes they’re reliable and sometimes they’re not. And sometimes a client might have had them for liable for years and then all of a sudden they have a new transaction and it’s no longer reliable. Edmonton Accountant it’s the old thing, the client doesn’t know what they don’t know you just this week we had a new client come in and take a look at his financials and there’s never once been any salary or dividends paid to anybody ever in the company. Um, so, uh, I don’t know how like I was, you know, but yet the guys making a living and making, taking money out of the company so we know for sure they are wrong and they’ve been relying on them and filing tax returns on that and making business decisions out on them and the wrong, you know, it’s Kinda like, you know, you want to hire an electrician to rewire your house and you hire the guy from Kijiji who, you know is not a journeyman electrician, um, that house might burn down.

So, uh, I’m not sure the, you know, trusting your year end numbers and in a business that’s your, your, your livelihood. This is not a side business, but this business is your livelihood of trusting it to a non CPA. Um, you know, that’s not a risk. I think most, most business owners should we, should we be taking. No, not at all. Edmonton Accountant, what are some of the things that you do when completing ntrs to go above and beyond to require possibility to test Jane straight that the records are reliable? Yeah. A couple of things I like to do is we like to get the, uh, the bank statements, so we’re actually looking at the bank statements even though the numbers are arithmetically correct. And we can verify the balance sheet balances we’ve added and subtracted the income and the expenses on the income statement. We actually want to match that to the bank statements.

Uh, we’re usually looking at the ar listening to make sure that, that in fact it is reasonable. We’re doing a bit of reasonability, Edmonton Accountant, testing, uh, so we’re looking at that. A summary of age receivables, making sure that’s good. Often we’ll get a number of documents to verify the assets and liabilities are actually the balances. I’m usually just getting the source documents from the client and taking it at face value. So skipping the step of going straight to the bank, which is a little bit unnecessary. And like the client’s telling you the truth, it’s going to come in truthfully, so they can. They’re very capable of getting the statements themselves. We do that. We also go through the, you know, the exercise. I’ve actually importing the general ledger right into the year end software because then we can actually drill through the transactions seat, we can reclassify if necessary, see if there’s any mistakes that have more granual level, um, you know, so I think our idea is to get the reliable information to spend, you know, use our professional judgment to give us reliable information as possible for a price point that’s reliable for businesses too.

So, you know, there’s no point of doing checklists that don’t benefit the client, you know, we’ve got to have a clear that there’s likely to be a misstatement here. Edmonton Accountant So let’s spend some time here, but let’s not do anything over and above. Awesome. So I think that’s what we have for today. So again, thanks guys for watching. If you have any questions, um, you know, feel free to leave any comments below and we’ll answer your questions. Any future videos. Thanks very much.