What question should the engagement answer?
Define the operation, periods, accounting basis, and purchase form. State who will use the report and why. Specify tests and exclusions before asking for records. The report should answer the buyer's stated question within a clear scope.
The valuation hub connects this work with price. The company-worth guide explains that supported earnings are one input. The buyer still needs pricing assumptions, cash needs, and an operating plan.
Agree on records, access, reviewers, findings, and limits. Quality of earnings does not automatically cover all taxes, liabilities, asset condition, contracts, or authority to operate. Assign those other tasks. Keep open matters visible rather than implying broader assurance.
How are financial records tied together?
Tie statements to tax returns, ledger detail, invoices, payroll, bank activity, and relevant balances. Align dates and methods. A mismatch may reflect timing, scope, or an error. Investigate it before alleging dishonest reporting.
IRS Publication 583 describes records for business income, expenses, and assets. Use those records to explain reported amounts. A summary may help locate a question without answering it. Obtain the detail needed to trace a material finding to the underlying activity and amount.
IRS Publication 538 explains tax accounting methods and timing. Cash-basis tax totals may differ from accrual-style reports. Ask the accountant to bridge the difference and assess the reporting basis used. Neither export should silently replace the other merely because its result looks more favorable.
Save filters, versions, dates, and reasons for changes. New job statuses or date ranges can alter exports. Preserve the earlier evidence so a reviewer can reproduce the result and explain a revision.
What does cash proof test?
Bridge reported activity to collections and bank movement. Identify receivables, deposits, refunds, credits, transfers, financing, and owner transactions. Deposit totals can match sales while different items offset. Trace each material difference instead of assuming every receipt is earned revenue.
Current SBA SOP 50 10 8.1 sets cash-proof and independent lender-benefit requirements for covered acquisitions. It defines periods and limited-history treatment. Confirm which requirements apply before hiring a reviewer. An existing seller report does not automatically meet the lender's independence, scope, or acceptance requirements for this purchase.
The SBA financing guide develops those conditions. Here the accountant must explain the bridge and unsupported amounts. State which accounts and periods were tested. List missing records and their effect on the finding so an unanswered question does not become an assumed zero difference.
State whether tests cover all records, a defined sample, or selected issues. Explain sample choice and retain its limits. Selected jobs can inform a question without proving that every transaction followed the same pattern.
How should revenue timing and customer obligations be examined?
Trace selected jobs through authorization, service, invoice, payment, and later credits or callbacks. Review deposits, open work, prepaid memberships, and remaining duties. Cash received and revenue earned can differ. Use the reporting basis and actual customer terms to decide what belongs in the period and why.
FASB staff revenue Q&As discuss upfront fees and stand-ready promises. These educational answers are not the authoritative Codification. Actual rights and performance duties matter. The accountant should identify the relevant reporting analysis rather than treating every upfront receipt as identical or automatically earned on collection.
In a hypothetical review, a $20,000 December invoice concerns work done in January. Inspect the contract, job records, service dates, and accounting policy. Those facts determine the period analysis. This invented invoice illustrates a question; it does not establish an automatic adjustment or a finding about a real company.
The working-capital guide covers balances delivered at closing. Link revenue findings with inherited duties. Trace each effect through earnings and closing accounts so the same duty is not counted twice without a supported distinction.
Which operating costs can distort recurring margins?
Review labor, materials, subcontractors, refunds, callbacks, insurance, rent, software, and management. Test missing, miscoded, or shifted costs. Follow the records before assuming a low expense line proves efficiency or changing recurring margins in the purchase model.
Rising gross margin can reflect price, work mix, utilization, or coding. Examine the cause before projecting lasting improvement. Tie job results to payroll and company books where records permit. Note missing detail. Growth in a reported margin alone does not show which operational change produced it or whether it will continue.
The add-backs guide tests support and replacement costs. Removing owner pay may leave work the buyer must fund. Identify management and qualified supervision still needed. Confirm costs already recorded before adding replacements so the buyer's model neither omits the role nor charges for the same work twice.
Separate recurring costs, deferred repairs, and future equipment spending. Adding back depreciation does not remove cash needs. Show which schedule captures each effect and why, so one repair is not charged twice under different labels.
What do related parties and concentration reveal?
Identify related-party rent, pay, loans, purchases, and other material deals. Ask what continues under the buyer's plan. Support any arm's-length change. The relationship alone proves neither an improper charge nor the right replacement amount.
Define the period and denominator for customer or payer concentration. Sales, collections, gross contribution, and contract dependence answer different questions. A large payer may create margin, authorization, payment, or continuity risks. Examine those mechanisms and actual terms rather than assuming its revenue share alone measures the buyer's exposure.
No universal concentration threshold is supplied here. Record the dependence, terms, explanation, and evidence. Explain the possible effect. Keep a measured finding distinct from a risk still needing records; equal sales shares can mask different rights and costs.
How should findings be recorded?
Link the issue ledger to records. Separate facts, estimates, proposed changes, seller responses, and questions. Assign review and next action. A proposed change is not accepted merely because it enters the latest draft.
| Review area | Evidence trail | Potential output |
|---|---|---|
| Cash reconciliation | Ledger, receipts, bank movement, and balances | Explained differences or unsupported amounts |
| Revenue cutoff | Contract, job dates, invoice, and credits | Period adjustment or further review |
| Customer obligations | Terms, prepayments, and remaining services | Accounting and closing-allocation question |
| Recurring costs | Payroll, invoices, and operating duties | Supported normalization |
| Related parties | Agreements, actual charges, and replacement basis | Arm's-length assumption or unresolved amount |
| Concentration | Defined customer or payer reports and contracts | Specific sustainability or continuity dependence |
These are possible outputs, not findings about a target. Some can be measured; others need records or specialist advice. Mark evidence and status so readers can distinguish known amounts from assumptions and open questions.
How can confidential records remain controlled?
The FTC's business information-security guidance advises understanding sensitive data, limiting retention, and controlling access. Apply those principles to diligence records. Identify who needs which information and why. A financial review needs suitable evidence without granting every participant unrestricted access to personal, payment, or employee data.
Agree on access with parties and advisers. Redacted samples or summaries may answer some questions; reviewers may need more detail for others. Preserve necessary evidence and suitable access controls. Explain the reason for a request instead of distributing every identity or payroll field simply because it is available.
Record recipients and permitted use and retention. Interpret the confidentiality agreement under its actual wording. It does not grant blanket permission to circulate the room among all possible investors or providers. Confirm approved participants and their duties before sharing, with counsel addressing questions that the financial engagement does not cover.
What should happen before relying on the final report?
- Confirm the engagement scope, periods, independence, and intended users.
- Reconcile statements, source records, and cash with documented definitions.
- Test revenue timing, obligations, costs, and proposed adjustments.
- Record related-party and concentration dependencies without automatic conclusions.
- Separate quantified effects from unresolved or out-of-scope matters.
- Connect accepted findings to valuation, funding, and transaction conditions once.
Review limits and open items with advisers. The four-number screen keeps earnings, value, and proceeds distinct. Carry accepted findings into the right model once. Assign a reviewer and clear next step for unresolved items.