San Jose CPA - Financial Statements

Which type of financial statements do I need?

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?

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.

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."

Which method of accounting should my construction company be using?
You should use either the percentage-of-completion method or the completed contract method and that should be decided only after careful evaluation of the specific circumstances involved.

Generally, the use of the percentage-of-completion method depends on management's ability to make reasonably dependable estimates of contract revenues, costs, and the extent of progress toward completion. SOP No. 81-1 states that the percentage-of-completion method is preferable if reasonably dependable estimates can be made and if all of the following conditions exist:

1. The contract includes provisions that clearly specify the enforceable rights of the parties as to goods or services to be provided and received, the consideration to be exchanged, and the manner and terms of settlement.
2. It is expected that the buyer can satisfy his obligations under the contract.
3. It is expected that the contractor can perform his contractual obligations.

Sufficiently dependable estimates can be made by entities that engage continuously in long-term contractual arrangements, and for whom such contracts represent a significant part of their operations.

The criteria for use of the percentage-of-completion method have not been altered in many years.

The completed contract method is preferable only in circumstances in which reasonably dependable estimates cannot be made, or in which there are other inherent hazards that make estimates doubtful. Examples are contracts whose validity is seriously in question or whose completion may be subject to the outcome of pending legislation or litigation.


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?

You will probably want to use a small business accounting software 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.