Accounting 101

The Accounting Basics You Should Know for Your Business

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Levels of Financials

Understand the levels of Statement Reporting:

Level One - Compiled Financial Statements

A compilation is when the Certified Public Accountant (CPA) assists the client in presenting financial information in the form of a financial statement. This may be done without the preparation of a statement of cash flow or the disclosure of various footnotes. In a compilation, a CPA does not examine any documentary evidence, perform any inquiry or analytical procedures, test any underlying financial records, or perform any sort of fraud or risk assessment.

    Level Two - Review Financial Statements

    A review level financial statement reporting is more costly and time consuming than a compilation because the CPA will perform analytical procedures and make inquiries of company personnel which will provide limited assurance that there are no material errors or misstatements with the financial statements presented. This level of scope is substantially less than an audit and does not involve obtaining an understanding of the Company’s internal control or assessing fraud risk.

    In a reviewed financial statement, there is no testing of the underlying accounting records or the process of obtaining outside evidence or independent confirmation. However, because of the additional procedures performed during the course of a review, there is a better chance that those efforts might lead to the discovery of a financial impropriety or misstatement.

      Level Three - Audited Financial Statements

      This is the highest and most costly level of independent financial reporting. An audit is not specifically performed to detect fraud or embezzlement but to objectively present the financial statements in accordance with Generally Accepted Accounting Principles.

      Prior to the commencement of the fieldwork, the audit engagement team will meet to design audit tests and discuss internal controls in order to identify fraud and misrepresentation risk areas. During an audit, the auditors will sample internal supporting documents and other accounting records such as journal entries. Auditors will also make inquiries of select company personnel. An audit does not examine all transactions. An audit is performed to render an opinion on the internal financial controls and the financial statements taken as a whole.

        Report Letter

        This letter identifies which level of financial statement reporting the presenter has elected to use in preparing the financial statement

        Balance Sheet

        The statement that reflects values of assets, liabilities, and equity at a specific date.

        Income Statment

        The statement that shows revenues, expenses, and profit or loss for a specific period.

        Statement of Changes in Equity

        The statement that reflects the movement and balance of equity for the period.

        Statement of Cash Flows

        The statement that reflects the cash flow of the entity during the period.

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        Notes to the Financial Statements

        Notes to important items that are presented in the above mentioned financial statements.

        Statement of Cash Flows

        The statement that reflects the cash flow of the entity during the period.

        i

        Notes to the Financial Statements

        Notes to important items that are presented in the above mentioned financial statements.