Notes to the Financial Statements, Explanatory Notes
The purpose of including explanatory notes to financial statements is to provide adequate disclosure of important facts about a company that would not be obvious simply by reviewing the financial statements. Although notes to the financial statements, like the financial statements themselves, are representations made by the client company, when asked to offer an unqualified opinion about the accuracy of a company's financial statements. A CPA firm will normally assist their client in writing the notes to the financial statements. Disclosure requirements that have become a part of the basic audit include:
- The disclosure of significant accounting policies, such as inventory valuation methods,
- Disclosure of changes in accounting policies,
- Comments relating to any contingent liabilities and their potential impact on the company,
- Information about to operating leases,
- Information about off balance sheet financing,
- Comments relating to changes in demand for the company's goods and services, loss of key customers, and concentration of business among a limited number of customers,
- Information about pension liabilities, both funded and unfounded,
- Analysis relating to whether or not the company seems to be a "going concern."
From a creditor's perspective, it is possible that the most important information is in the notes, not the Balance Sheet or Income Statement or Statement of Cash Flows.
Note that contingent liabilities are identified in the Explanatory Notes, but an estimate of
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