The standard opinion for audits of financial statements conducted in accordance with “auditing standards generally accepted in the United States” (GAAS) explains which financial statements were covered in the audit, the basis of accounting (typically accounting principles generally accepted in the United States of America [GAAP]) applied in preparing the financial statements, management’s responsibility for the statements, the responsibilities of the auditor, and the auditor’s opinion as to whether the financial statements are fairly presented.
What Are the Different Types of Audit Report Modifications?
The three broad types of audit report modifications are: 1) qualified opinions, 2) adverse opinions, and 3) disclaimers of opinion.
Qualified opinions state that except for the effects of the matter(s) to which the qualification relates, the financial statements are fairly presented. Adverse opinions state that the statements are not fairly presented in accordance with the accounting framework specified. Disclaimers of opinion disclaim an opinion on the financial statements.
What Could Lead to a Modification of the Standard Audit Opinion?
Significant GAAP departures are cause for either a qualified opinion, or if the departure is material and pervasive, an adverse opinion. GAAP departures may be in the form of measurement exceptions or disclosure exceptions. Measurement exceptions arise when GAAP provisions are not properly applied. Example scenarios include failing to record all lease obligations, failing to properly account for contingent losses related to a lawsuit, or computing depreciation expense in accordance with a methodology other than GAAP. Disclosure exceptions occur when disclosures or information required by GAAP to be presented are omitted or not presented in accordance with GAAP. For example, failure to disclose future commitments under long-term leases, present a statement of cash flows, or present comprehensive income and its components is likely to result in a report modification.
Limitations on the auditor’s ability to obtain sufficient appropriate audit evidence can lead to report modifications, or to the auditor withdrawing from the engagement. Examples of such scope limitations are situations in which the auditor is unable to confirm receivables or observe the physical inventory count. Scope limitations may be either client or circumstance-imposed; the materiality and source of limitation is evaluated in determining what report is appropriate.
Uncertainties may also trigger audit opinion modifications. The most typical uncertainty cited in audit opinions is uncertainty as to whether an entity will be able to continue as a going concern. Such an uncertainty may lead to a disclaimer of opinion.
Given the complexity of GAAP and required disclosures, there are many possible scenarios in which a report modification could be necessary. If you’d like to find out more about audit opinion modifications relating to your unique circumstances, please contact Aronson Quality Control expert Rachel Plumley at 301.231.6200.
The most popular method of accounting is cash basis, primarily because of its simplicity. Reporting on the cash basis allows the business to report income as cash received and expenses as they are paid. Under the accrual method, income is reported in the year it is earned and expenses are either deducted or capitalized in the year they are incurred.
Cash basis tax reporting is best for companies who are in their growth phase where their accounts receivable grows each year and is in excess of their accounts payable and other accrued liabilities. This allows for a deferral of taxable income related to those receivables until actually collected. However, there are limitations on what entity types are eligible to report on the cash basis. With a few exceptions, C-corporations are generally not eligible to report on the cash basis method for tax purposes. However, many partnerships, limited liability corporations, and S-corporations are eligible to use the cash basis method for tax reporting.
For more information, please contact your Aronson tax advisor or Melissa Tarkett at 301.231.6200.
A number of factors affect the duration and cost of an audit, such as the size of the company, the number of transactions, and the complexity of accounting concepts. For instance, a car wash business typically has straight forward accounting concepts, but have a high volume of transactions. On the other hand, an investment company typically faces complex accounting concepts that can take longer to audit than the actual transactions themselves.
Regardless of the entity, there are some key factors that can reduce audit fees and the duration of the audit: 1) the accuracy of accounting data provided to the auditors; 2) the strength of the entity’s internal controls; 3) the responsiveness of client personnel to the auditors. With these factors in place, it is much more likely that the audit will be performed efficiently, resulting in a lower cost and quicker delivery.
For the majority of our clients, the decision whether or not an audit is required is driven by their standing credit agreements. When extending credit to a company, a bank will assess the risk associated with the loan and the level of sophistication and accuracy of the company’s financial reporting. Using that assessment, as well as the size of the facility, they will typically determine the level of assurance required for the annual (or more frequent) financial reporting. In other words, it depends.
As a general rule of thumb, once a facility reaches $750,000 – $1M, a review is typically requested. At $3M or higher the banks typically require audited financial statements.
That is not to say that you could not request an audit in order to gain a higher level of comfort (if your bank only required reviewed financials) for ownership or other reasons. For example, an audit report may be requested in the case where a company is marketing itself for sale or in some cases when bidding on contracts or new work. At Aronson, we have a number of clients who elect to undergo audits even if they do not have financial reporting requirements.
A business line of credit loan helps businesses grow, operate, and can provide security in case the company runs into financial difficulties or unexpected situations. Your business has the flexibility to choose when and how much capital to use with a line of credit. In order to obtain a line of credit for your business, there is specific information that a financial lender must receive.
When applying for a line of credit, business owners typically need to provide the lender with financial information about the business. The financial documentation typically includes a profit and loss (P&L) statement, balance sheet and tax returns. The amount of the line of credit is commonly dependent upon the comfort level a lender obtains when reviewing the company’s revenue performance and ability to repay the line of credit. The ability to repay the line of credit is determined by reviewing the company’s cash flow history and balance sheet. It is also common practice for lenders to ask for a business plan to see what are the company’s long term goals and vision are.
Both the business and the individuals who own the business need to have a good credit rating in order to obtain a line of credit. The individual owners need a strong credit rating because lenders typically ask for a personal guarantee that the line of credit will be repaid. This is common when a startup company is applying for a line of credit.
Lenders may or may not require collateral to secure the line of credit. A well-established business might receive unsecured lines of credit when they can demonstrate a strong ability to repay the debt. It is harder to get a line of credit for startup businesses since there is no company financial history. Lenders require collateral in order to secure a line of credit for startup businesses. New businesses without a credit history typically have an asset based line of credit.
A line of credit loan is not intended for large long term investment purposes. Businesses should apply for line of credit before they need it.
For more information on this topic, please contact your Aronson business advisor or Alperen Okay at 301.231.6200.
Have another question? Tweet @AronsonLLC using hashtag #AskAronson or submit a blog comment to get an answer!