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Accounting

Audit opinions: How your financial statements measure up


Audit opinions differ depending on the information available, financial viability, errors discovered during audit procedures and other limiting factors. The type of opinion your auditor issues tells stakeholders whether you’re in compliance with accounting rules and likely to continue operating as a going concern.

The basics

To find out what type of audit opinion you’ve received, scan the first page of your financial statements. Known as the “audit opinion letter,” this is where your auditor states whether the financial statements are fairly presented in all material respects, compliant with Generally Accepted Accounting Principles (GAAP) and free from material misstatement. But the opinion doesn’t constitute an endorsement or evaluation of the company’s financial results.

Most audit opinion letters consist of three paragraphs. The introductory paragraph identifies the company, accounting period and auditor’s responsibilities. The second discusses the scope of work performed. The third paragraph contains the audit opinion.

In general, there are four types of audit opinions, ranked from most to least desirable.

1. Unqualified. A clean “unqualified” opinion is the most common (and desirable). Here the auditor states that the company’s financial condition, position and operations are fairly presented in the financial statements.

2. Qualified. The auditor expresses a qualified opinion if the financial statements appear to contain a small deviation from GAAP, but are otherwise fairly presented. To illustrate: An auditor will “qualify” his or her opinion if a borrower incorrectly estimates warranty expense, but the exception doesn’t affect the rest of the financial statements.

Qualified opinions are also given if the company’s management limits the scope of audit procedures. For example, a qualified opinion may result if you deny the auditor access to a warehouse to observe year-end inventory counts.

3. Adverse. When an auditor issues an adverse opinion, there are material exceptions to GAAP that affect the financial statements as a whole. Here the auditor indicates that the financial statements aren’t presented fairly. Typically, an adverse opinion letter contains a fourth paragraph that outlines these exceptions.

4. Disclaimer. Even more alarming to lenders and investors is a disclaimer opinion. Disclaimers occur when an auditor gives up midaudit. Reasons for disclaimers may include significant scope limitations, material doubt about the company’s going-concern status and uncertainties within the subject company itself. A disclaimer opinion letter briefly outlines the auditor’s reasons for throwing in the towel.

Ready, set, audit

Before fieldwork starts for the audit of your 2018 financial statements, let’s discuss any foreseeable scope limitations and possible deviations from GAAP. Depending on the situation, we may be able to recommend corrective actions and help you proactively communicate with stakeholders about the reasons for a less-than-perfect audit opinion. Reach us at Office@CPAsite.com or 904-396-5400.

© 2018

How auditors assess risk when preparing financial statements


Every year, your audit firm will conduct a fresh risk assessment before the start of fieldwork. Why? Because your auditor wants to mitigate the risk of expressing an incorrect opinion regarding the accuracy and integrity of the company’s financial statements. Inadvertently signing off on financial statements that contain material misstatements can open a Pandora’s box of risks — from shareholder lawsuits to increased regulatory oversight.

3-prong assessment

Audit risk is a combination of three components:

1. Control risk. Sometimes a company’s internal controls are inadequate to prevent or detect material misstatements. Control risk increases when the company fails to deploy and enforce effective internal controls, or when employees or third parties override them without the company discovering their actions.

2. Inherent risk. This term refers to susceptibility to a material misstatement, regardless of whether the company has strong internal controls. Certain transactions and industries present greater inherent risk than others.

For example, companies operating in developing countries face a greater threat of bribery and corruption by government officials, regardless of the internal controls they put in place. Inherent risk is also greater when accounting transactions are complex or involve a high degree of judgment.

3. Detection risk. Audit procedures are designed to uncover material misstatements. Detection risk is high when there’s a high probability that substantive audit procedures will fail to detect a material misstatement. When detection risk is elevated, the auditor might, for example, test a larger sample of transactions to mitigate audit risk.

Control risk and inherent risk stem from a company’s industry and actions. Conversely, detection risk is typically managed by the audit team.

Customized audit procedures

The auditor’s role is to attest to your company’s financial statements. Specifically, your audit firm assures that your financial statements are “fairly presented in all material respects, compliant with Generally Accepted Accounting Principles (GAAP) and free from material misstatement.”

Unqualified (or clean) audit opinions require detailed substantive procedures, such as confirming accounts receivable balances with customers and conducting test counts of inventory in the company’s warehouse. Generally, the more rigorous the auditor’s substantive procedures, the lower the likelihood of the audit team failing to detect a material misstatement.

Collaborative effort

Audit season is coming soon for calendar year-end entities. Before the start of fieldwork, let’s discuss changes in your business operations, accounting methods and industry conditions, along with other factors, that could create audit risk. We’ll adjust our audit programs accordingly to ensure that your financial statements are prepared with the highest level of quality and efficiency.  Contact us at 904-396-5400 or Office@CPAsite.com. 

© 2018

It’s time for a midyear checkup!

Time flies when you’re busy running a business. But it’s important to occasionally pause and assess interim performance — otherwise you’re likely to be surprised by the year-end results. When reviewing midyear financial reports, however, recognize their potential shortcomings. These reports might not be as reliable as year-end financials, unless a CPA prepares them or performs agreed-upon procedures on specific accounts.

Diagnostic benefits

Monthly, quarterly and midyear financial reports can provide insight into trends and possible weaknesses. Interim reporting can be especially helpful for businesses that were struggling at the end of 2017.

For example, you might compare year-to-date revenue for 2018 against 1) the same time period for 2017, or 2) your annual budget for 2018. If your business isn’t growing or achieving its goals, find out why. Perhaps you need to provide additional sales incentives, implement a new ad campaign or alter your pricing.

You can also review your gross margin [(revenue – cost of sales) ÷ revenue]. If your margin is slipping compared to 2017 or industry benchmarks, find out what’s going wrong — and take corrective actions.

Don’t forget the balance sheet. Reviewing major categories of assets and liabilities can help detect working capital problems before they spiral out of control. For instance, a buildup of accounts receivable may signal collection problems. Or, if your company is drawing heavily on its line of credit, operations might not be generating sufficient cash flow.

Potential shortcomings

When interim financials seem out of whack, don’t panic. Some anomalies may not be caused by problems in your daily business operations. Instead, they might be caused by informal accounting practices that are common midyear (but are corrected by your CPA at year end).

For example, some controllers might liberally interpret period “cutoffs” or use subjective estimates for certain account balances and expenses. In addition, interim financial statements typically exclude costly year-end expenses, such as profit sharing and shareholder bonuses. Interim financial statements, therefore, generally paint a rosier picture of a company’s performance than its year-end report potentially may.

Furthermore, many companies perform time-consuming physical inventory counts exclusively at year end. Therefore, the inventory amount shown on the interim balance sheet might be based solely on computer inventory schedules or, in some instances, the controller’s estimate using historic gross margins. Similarly, accounts receivable may be overstated, because overworked controllers may lack time or personnel to adequately evaluate whether the interim balance contains any bad debts.

Proceed with caution

Contact the experienced team at P&R for help interpreting your midyear results, as well as detecting and correcting potential problems. Unlike year-end financials, interim reports are seldom subject to external audit or rigorous internal accounting scrutiny. We can remedy any shortcomings by performing additional testing procedures on your interim financials — or preparing audited or reviewed midyear statements that conform to U.S. Generally Accepted Accounting Principles. Reach us at Office@CPAsite.com or 904-396-5400.

© 2018

Florida Pursues Reputation of ‘Most Veteran-Friendly’ State with New Law

Florida governor Rick Scott recently signed into law Senate Bill 100, “Taxes and Fees for Veterans and Low-income Persons,” which eliminates the local business tax for Veteran small business owners.

Effective July 1, 2018, the law creates an exemption from local business taxes and fees for honorably discharged Veterans and their spouses. The Veteran must own a business with fewer than 100 employees.

The exemption also applies to widows/widowers of honorably discharged Veterans if they’re not remarried, as well as to the spouses of Active Duty members who relocate to Florida pursuant to a permanent change of station order.

To receive the exemption, the Veteran business owner must complete and sign a Request for Fee Exemption and provide documentation to support the request. The local governing authority provides the forms.

SB100 also eliminates the $1 or $2 fee previously charged to display the word “Veteran” on an ID card or driver’s license. Additionally, Veterans will no longer be charged the $6.25 service fee for obtaining a driver’s license if they present documented proof of their status.

We say, not a moment too soon! Patrick & Raines CPAs, an Army Veteran-founded accounting firm, appreciates Active Duty and Veteran members of the military and their service to all of us.

Whether they stormed the beaches of Normandy, fought to a truce in Korea, managed guerilla warfare in the Vietnam jungles, survived the sandy battles of Iraq, traversed the hazardous mountains of Afghanistan, or served in top-secret locations we’ll never know about, our Service members stood the watch, consistently defending our national security.

Here’s to our Soldiers, Sailors, Marines, Airmen and Coast Guardsmen…and the state of Florida for recognizing their service.

Since 1982, P&R has assisted small business owners with a variety of business consulting, bookkeeping, tax, and assurance needs. Contact us if we can help:  Office@CPAsite.com or 904-396-5400.

Are my workers employees or independent contractors?

A good bookkeeper knows a key tenet of limiting potential problems with the Internal Revenue Service is categorizing employees properly to pay them correctly.

Sometimes areas of uncertainty surround a worker’s status. The employer determines the degree of control he or she maintains over a worker (or the degree of independence provided the worker). The general rule established by the IRS states an individual is an independent contractor if the payer controls or directs only the result of the work; not what or how it gets done.

Unfortunately, no explicit rules exist to define “directing only the result of the work,” so consider the following factors:

  • Does the employer hold “behavioral control” over the worker?
    • Employers usually decide how, when, and where employees’ work will be done, while independent contractors usually exercise more flexibility.
    • A worker needing little or no instruction may be an independent contractor.
    • Independent contractors are usually responsible for their own training, while an employer is normally responsible for an employee’s.
    • The ability to hire assistance may suggest an independent contractor.
  • How are expenses and compensation paid?
    • A significant investment by the worker (such as purchase of tools or equipment) may indicate he or she is an independent contractor.
    • Unreimbursed expenses may suggest the worker is an independent contractor.
    • Independent contractors frequently charge flat fees and can make a profit or loss on the job.
    • An employee’s services are available to the employer, while an independent contractor’s services are available to the market.
    • The payment method (credit card, direct deposit payroll, etc.) is a factor in determining whether the worker is an employee or independent contractor.
  • What type of legal relationship exists between the payer and worker?
    • A contract for services or employment could be a determining factor.
    • If benefits are provided, the recipient is most likely an employee.
    • A temporary relationship often indicates an independent contractor, while something more permanent may be held by an employee.
    • An independent contractor will most likely advertise in the marketplace, while an employee may post availability only on job search websites.

IRS Publication 1779 and Publication 15-A give additional guidelines. If you’re still unclear you can submit a request for the IRS to determine the status of your worker.  Be aware, though, the IRS could take up to six months to answer your inquiry.

Still confused? Patrick & Raines CPAs, which offers independent contractor CFO and bookkeeping services, employs a tested team of experienced accountants who can help.

Contact us at Office@CPAsite.com or 904-396-5400.

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