3.3.5 Ethical issues related to financial reports

Question 1

Define an audit

Answer 1

An audit is an independent examination of financial information. Financial audits may be both internal and external. All public companies and many other organisations must have their accounts externally audited to make sure that the information provided is a true and proper record of their finance

Question 2

What are internal audits?

Answer 2

Sometimes large businesses will also use their own internal auditors to check for irregularities. These auditors, who are employees of the business, assess the truth and accuracy of the business records.

Question 3

Define inappropriate cut off periods

Answer 3

‘Inappropriate cut off periods is the use of different cut of periods to give a misleading impression of the current financial performance of a business. Businesses will sometimes try to understate their profits to avoid paying tax or they will overstate profit to attract investors or a better take over as a sales bid. For a true representation, the matching principle should apply. This means revenues and costs should be matched to the period in which they occurred.

Question 4

Explain misuse of funds

Answer 4

Misuse of funds involves using business money inappropriately. Auditors may find themselves of company officials using company assets for their own gain. Misuse of funds will most often occur when a business purchase inputs or supplies.

Question 5

Define Fictitious revenues

Answer 5

Fictitious revenues- these are revenues that do not exist and have been included to make the business look better than it really is.

Question 6

Define hidden liabilities and expenses

Answer 6

these are often not included in balance sheets or income statements or are amalgamated with other liabilities or expenses to hide the true out-going from owners, shareholders or other stakeholders

Question 7

Define Improper discloses or omissions

Answer 7

Omitting financial details can obscure the accurate financial position of a business. It is also unethical to make a disclosure that something exists when in fact it does not exist at all

Question 8

Define fraudulent asset valuations

Answer 8

this can be a variation of historical value or reckless valuing of intangible assets such as goodwill