Company Reporting & Auditing Flashcards
Who has an interest in financial reports?
Stakeholders
Name at least five groups of stakeholders:
Customers Investors Employees Suppliers Creditors Governments General Public Analysts Media
Name the four main accounting standards:
- OR - Swiss code of obligations
- IFRS
- US-GAAP
- Swiss GAAP FER
What is the principle of prudence in accounting?
Meaning:
Reason:
Used by:
What is the True and Fair View?
Meaning:
Reason:
Used by:
Give a historic recap of the OR
The OR is a sovereign right that is state legislation.
There have been 4 revisions based on social and economic changes.
The last revision took place in 2013 and notably made regulations now apply to all ventures regardless of the legal form except for sole proprietorships and partnerships with revenues under 500,000CHF.
What are the two main objectives pursued with IFRS?
- International companies are provided with universally applicable accounting standards
- Countries that do not have their own standards have access to universally accepted ones
Who publishes the IFRS?
IASB (International Accounting Standards Board)
Describe the IASB:
IASB is a private non-profit that is funded notably by the EU and various national governments, accounting firms, and its own licenses and publications.
The IASB under the IFRS Foundation publishes the IFRS standards and various other materials for interpreting them.
Describe the US-GAAP
In our context only applies to large companies publicly traded on the US Stock exchange.
Extremely extensive and clearly rule-based
FASB is the responsible rule setter
Principle based
OR and Swiss GAAP FER
formed generally and serve more as guidelines
Rule based
IFRS and US-GAAP
cook book accounting; e.g. every single accounting issue must be regulated somewhere
General requirements
OR; you look for the principle or basic principle
Topical focus
IFRS, US GAAP, Swiss GAAP FER; look for the concrete details/facts
Swiss GAAP FER
For medium sized companies in Switzerland and follows accounting by true and fair view
Audit
comparison of reported information with its underlying real economic transactions
Mitigates the information asymmetry between investors and management, so most informed decision making is possible
Scope depends on size and financing of company
No statement regarding the quality of the management
Audit report
result of the comparison of reported information and underlying real economic transactions
Small company auditing
have a less extensive audit and under certain circumstances no audit at all
Large company auditing
must have an ordinary audit and listed companies are generally subject to the strictest audit
Internal audit
integral part of a company that audits in accordance with management guidelines
External audit
audits are on a contractual basis and is independent, coordinates with internal audit
Auditor
represents the interest of investors and are thus elected by the general meeting of shareholders (general assembly)
Big4
Deloitte, Ernst & Young, KPMG, pwc
Only about 50% of their business is auditing, the other 50% is management consulting, M&A, tax consulting, and legal advice
Mainly focus on large listed companies
Auditing standards
regulations that define exactly how an auditor must proceed while undertaking an audit
CH - PS or Prüfungstandards
International - ISA (International Standards on Auditing)
USA - GAAS (Generally Accepted Auditing Standards)
Auditing rules of conduct
- Independence
- Integrity and Objectivity
- Confidentiality
- Professional Competence
- Appearance
Audit supervisory institutions
Approve auditors and are concerned with quality of audits being carried out; inspecting documents of auditing company and reexamine auditing activities
Audit expectation gap
The general public expects more from auditors than is possible
Statement of profit or loss (Income statement)
Expenses Revenue
Profit
records success/failure of a company’s operations for a given time period
Importance:
Company - shows development of performance
Investor - indication for promising investment
Employees - information for bonuses and raises
Statement of comprehensive income
Profit
+ Other comprehensive income
= comprehensive income
Statement of change in equity
comprehensive income
transactions with shareholders
= change in equity
Statement of financial position (Balance sheet)
Cash Liabilities
Other Assets Equity
Shows the financial status of a company or organization at a particular point in time
Assets = use of capital
liabilities and equity = sources of capital
Statement of cash flows
c. f. from operating activities
c. f. from investing activities
c. f. from financing activities
Shows sources from which cash was received and has been spent. Shows whether the company has enough cash to pay its bills; how liquid it is.
Cash flow statement complements income statement by reconciling the accrual basis of accounting with the cash basis
Notes
Explanations and details
Accounting equation
Assets = Liabilities + Equity
Current assets and liabilities
expected timeline of less than one year
asset will be turned into cash or used within one year
liabilities are due within one year
Non-current assets and liabilities
long-term positions
full value of the asset will not be realized or used within the current year
Capitalizing assets
asset is recognized on the balance sheet
expenditures are not recorded as an expense
costs are “parked” on the balance sheet
Recording expenses
when future benefits of the asset arise e.g. depreciation of a machine
benefits: use of machine and produced products
Initial valuation of assets and liabilities
Costs of acquisition or conversion
Subsequent valuation: Historic cost
measurement in which we only depreciate a non-current asset in subsequent periods
Valuation under IFRS
Initial measurement: acquisition cost or cost of conversion
Subsequent measurement: asset is regularly revalued at its current cost (current market value)
Impairment
One-time value adjustments due to sudden market changes or disruptions
Can only lead to decrease in value of asset although exceptions exist
Accrual accounting
Matches revenues with expenses at the time the transactions occur
exchange of cash is not decisive
ensures that the financial statements most accurately reflect the financial performance during a given period
Income statement: COGS Method
Sales revenue - COGS Gross profit - distribution expenses - administration expenses - other expenses EBIT
C.F. from operating activities
Shows:
- Information on progress of core business
- C.F.s resulting from sales activities (purchasing, production, sales, etc.)
- internal financing strength
Calculated via the direct or indirect method
C.F. from operating activities: Direct method
All cash inflows and cash outflows from operating activities are directly shown
+ Cash revenue
- Cash expenses
option: interest, dividends, taxes
= cash flow from operating activities (direct)
C.F. from operating activities: Indirect method
Most common among companies
Take an earnings figure from the income statement (EBIT) and incorporate the changes that affect cash
= EBIT \+ Non-cash expenses - Non-cash revenue \+/- Changes in operating working capital option: interest, dividends, taxes = cash flow from operating activities
