Start with the question and reporting basis
Confirm the business, reporting period, accounting basis, and whether the books are complete. Compare similar periods and note seasonality. On the income statement, review sales, direct costs, overhead, and unusual items. A strong sales month can still produce weak profit if delivery costs rise faster. Ask what changed operationally before assuming the difference reflects a permanent trend.
Use the balance sheet to challenge assumptions
Review cash, customer balances, inventory, equipment, supplier balances, loans, and owner accounts. Investigate stale receivables, unexplained liabilities, and negative balances that do not make sense. Compare loan balances with lender statements and asset records with actual purchases or disposals. The balance sheet often reveals missing entries that an income-statement-only review would overlook, including transfers incorrectly recorded as sales or expenses.
Explain why profit differs from cash
Prepare a bridge for customer collections, supplier payments, borrowing, principal repayments, asset purchases, and owner transfers. Ask which changes are recurring and which are temporary. For example, borrowing can increase cash without improving operating profit, while collecting an old invoice can improve liquidity without representing a new sale. End the review with a decision list and the unresolved questions for the accountant.
- Confirm the period, basis, completeness, and comparison period.
- Investigate unusual revenue, cost, asset, and liability balances.
- Reconcile debt and owner movements to supporting records.
- Explain the main differences between reported profit and cash.
Questions to consider
Does a profitable income statement mean I can pay every bill?
No. Collection timing, debt principal, capital spending, and other cash movements can create a shortage despite reported profit. Review a cash forecast as well.
What if I do not understand a balance?
Ask the bookkeeper to show the transactions and supporting records behind it. An unexplained balance should remain an open question until it can be reconciled.
Official sources and further reading
Use this guide to prepare questions and organize records. It does not determine eligibility, establish a professional engagement or guarantee a tax or business outcome.