Audits, Reviews and Compilations
Software License Audits
Question. Our software company licenses software to our
customers. We also provide our customers with maintenance agreements where
they pay maintenance fees according to the number of nodes they have in
service. We believe that an opportunity may exist to collect on "lost
revenue" by auditing several of our customers to see if they are paying
the correct amount of license fees based on the number of computers they
have running our software.
Answer. We can assist you with a compliance audit. We would
review the most recent agreement in effect with your customer, as well
as the number of nodes they report "in service" for the period covered
under the agreement, and then, proceed to verify actual nodes in service.
If we determined that your customer had underreported the number of nodes
in service, we would prepare an analysis that you could use to bill your
customer for those additional nodes.
Which type of financial statements do I need?
Q. I am ready to seek
bank financing for my company. I have been told that I will need financial
statements prepared by a CPA. I have also been told that I will not
need an audit. What is the difference between an audit, a review, and a
compilation?
A. There are three levels of service that an accountant can provide
with regard to financial statements. They are as follows:
The Audit
The highest level of service is an audit. An audit is a methodical
and objective examination of accounts and items that support the financial
statements of the company. For smaller non-public companies, the cost of
an audit may exceed the benefits derived. Generally, the purpose of an
audit is to express an opinion on or reach a conclusion about what was
audited. The next level of service lower than an audit is a review.
The Review
A review is a level of service that results in an expression of
limited assurance. The accountant communicates this limited assurance in
a report by stating that he or she is not aware of any material modifications
that should be made to the financial statements in order for them to be
in conformity with Generally Accepted Accounting Principles. The accountant
must perform sufficient inquiry and procedures to give a reasonable basis
for that conclusion. These inquiries and procedures are the major difference
between a review and the next level of service which is a compilation.
The Compilation
A compilation involves an accounting service in which an accountant prepares,
or assists in preparing, financial statements without expressing
any assurances that the statements are accurate and complete or
are in conformity with Generally Accepted Accounting Principles.
An accountant generally performs few, if any, procedures, and
it is substantially less than a review services report. For this
reason, the accountant's compilation report will include wording
similar to the following: "A compilation is limited to presenting
in the form of financial statements information that is the representation
of management. We have not audited or reviewed the accompanying
financial statements and, accordingly, do not express an opinion
or any other form of assurance on them." A compilation is
generally the least costly service in terms of financial statements
prepared by a CPA
Q. Our company is just getting started and we are still
in the process of getting our books set up and deciding on an
accounting package so we can generate our financial statements.
Where should we start?
A. You will probably want to use a PC-based accounting
package such as Quickbooks initially. It is a fairly straightforward
package to use and has become more powerful with each release.
Quickbooks is the most widely used small business accounting software.
So, chances are the CPA or bookkeeper you decide to work with
will be very familiar with Quickbooks and the questions and issues
that arise with Quickbooks. Once you are up and running with Quickbooks,
which typically costs $300 for a single user version of Quickbooks
Pro, you can evaluate whether Quickbooks meets your business needs.
With this approach, you would not be out-of-pocket to a great
extent for software or training costs. If you find that you need
a system that is more powerful, you can take time to evaluate
those reporting areas that are not being met in your business
and the packages that are out there that can meet your needs.
Keep in mind that larger accounting packages not only may require
a per-module price, but also annual maintenance fees and training
costs for the person who will be maintaining the books.
