When companies report financial results, they often rely on estimates made by management. Examples include the allowance for doubtful accounts, warranty obligations, costs of pending litigation, goodwill impairment and the fair values of acquired intangible assets. How do auditors evaluate whether amounts reported on the financial statements for these items seem reasonable?

Inquiry and testing

Accounting estimates may be based on subjective or objective information (or both) and involve a level of measurement uncertainty. External auditors evaluate accounting estimates as part of their standard audit procedures.

For instance, they may inquire about the underlying assumptions (or inputs) that were used to make estimates to determine whether the inputs seem complete, accurate and relevant. Estimates based on objective inputs, such as published interest rates or percentages observed in previous reporting periods, are generally less susceptible to bias than those based on speculative, unobservable inputs. This is especially true if management lacks experience making similar estimates in the past.

Whenever possible, auditors try to recreate management’s estimate using the same assumptions (or their own). If an auditor’s estimate differs substantially from what’s reported on the financial statements, the auditor will ask management to explain the discrepancy. In some cases, an independent specialist, such an appraiser or engineer, may be called in to estimate complex items.

Auditors also may compare past estimates to what happened after the financial statement date. The outcome of an estimate is often different from management’s preliminary estimate. Possible explanations include errors, unforeseeable subsequent events and management bias. If management’s estimates are consistently similar to what happened later, it adds credibility to management’s prior estimates. But if significant differences are found, the auditor may be more skeptical of management’s current estimates, necessitating the use of additional audit procedures.

Gray area in accounting

Accounting estimates and fair value measurements involve a high degree of subjectivity and judgment and may be susceptible to misstatement. In today’s uncertain market conditions, predicting metrics that underlie accounting estimates can be particularly challenging. Therefore, they require more auditor focus today than in more-stable prior accounting periods. Be prepared to provide comprehensive documentation to support your estimates during the upcoming audit season.

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CPA firms do more than audits and tax returns. They can also help you with everyday accounting-related tasks, such as bookkeeping, budgeting, payroll and sales tax filings. Should your organization outsource its accounting needs? Here are five potential advantages to consider when evaluating this decision.

1. Professional advice. Outsourcing to an experienced CPA firm provides access to professional guidance related to tax, legal and financial matters. This makes it easier to remain compliant with rules and regulations and avoid costly mistakes due to a lack of knowledge or errors in interpreting complex regulations.

By engaging a third-party firm, there’s a second set of eyes on your company’s books. This can provide peace of mind that your books accurately reflect the performance of your business. Additionally, a CPA can help streamline your accounting processes and help record complex transactions correctly.

2. Scalability. As your financial situation evolves, you can dial up (or down) the services provided by your CPA. For example, a start-up that outsources its accounting needs wouldn’t need to worry about outgrowing its bookkeeper over time — or training that individual to take on more advanced accounting and tax needs. Likewise, if you embark on a major financial project — such as a launching a new product, building a new factory or merging with a strategic buyer — your CPA has the expertise on-hand to help you achieve the best possible outcome from a financial and tax perspective.

Outsourcing can also be a viable temporary solution if you unexpectedly lose your CFO. This can provide breathing room while you search for a qualified replacement in today’s tight labor market.

3. Cost savings. Outsourcing can save you money on payroll taxes and insurance costs associated with hiring an in-house accountant. Further, CPAs enjoy economies of scale regarding software usage and purchases, so they likely can provide accounting services cheaper than your firm can by working alone or relying on independent service providers for each task.

4. Efficiency. When you transfer accounting functions to your CPA, your management team has more time for core marketing, product development and other activities. It also frees up resources for higher-value tasks that can increase cash flow and optimize efficiency within the organization, such as negotiating with prospects or building deeper relationships with existing clients.

5. Enhanced confidence with stakeholders. A CPA firm’s involvement can instill confidence in lenders and investors if you intend to borrow money or solicit investment capital. It shows that your firm is committed to maintaining accurate business records and has access to the expertise needed to address complex issues.

Contact us if you’re considering outsourcing your daily accounting tasks, either permanently or temporarily. We can tailor a cost-effective service plan that works for your current and future business needs.

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Almost 40 years after its launch, QuickBooks® remains the leading accounting software program for small and medium-sized businesses. If you decide to use QuickBooks for your bookkeeping needs, you may have questions about implementation and using it to run your operations. Here are answers to some basic frequently asked questions (FAQs) to help you get started.

What is QuickBooks?

It’s a robust accounting software that businesses can use to manage their accounting. Businesses use QuickBooks for many critical accounting tasks, such as recording expenses, creating invoices, tracking sales, producing reports, administering payroll and maximizing tax deductions.

Is QuickBooks easy to use?

Even for those unfamiliar with accounting software, QuickBooks is easy to use. It includes step-by-step instructions to help users begin using the software and guidance to help get the most out of it.

Setup time varies depending on your organization’s size, complexity and maturity. However, once setup is completed, QuickBooks may offer a scalable solution that can streamline your accounting processes and support your business at every stage of its development.

Are there different versions of QuickBooks?

There are versions for new businesses, established small and medium-sized businesses, and freelancers. QuickBooks also provides dedicated solutions for certain industry niches, including churches, construction, legal, nonprofits, restaurants and retail.

How do I access QuickBooks?

It’s available online or by purchasing off-the-shelf desktop software. The online version requires a minimal monthly fee, whereas the desktop version involves a larger annual fee. There’s also a mobile app that’s available for both iOS and Android devices.

Does QuickBooks provide user support?

QuickBooks’ website offers customer support. Users can find answers to common questions and troubleshoot problems with an advisor on the site. There are also online tutorials and user guides. If you’re unable to find answers on the website, however, we can provide answers — or arrange an in-depth training session for your staff.

Can my accountant help me use QuickBooks?

This software isn’t a substitute for your CPA, rather it can facilitate the working relationship between in-house and external accountants. With QuickBooks, we’ll have direct online access to your organization’s books. Plus, we can send requests for information and documents through the platform. Contact us with any additional questions you have about QuickBooks and other accounting software solutions.