Financial Accounting and Reporting Flashcards
Review definitions or descriptions for Section B in F1 CIMA exams. as CIMA wants from you.
Define audit
An audit is an independent review of a company’s financial statements by external auditors
The auditors produce a report to the shareholders that gives their opinion on the financial
statements.
Powers and duties of the external auditors
The primary duties of the external auditor are to report on truth and fairness and fair presentation
of the financial statements.
Fair presentation is taken as being factual, free from bias and reflecting the commercial substance
of the business’ transactions.
Auditors will express their opinion that the financial statements are free from material
misstatement in their audit report.
In preparing their report the auditors are required to consider the following:
๏ Compliance with legislation
๏ Truth and fairness of accounts
๏ Adequate records and returns
๏ Agreement of accounts to records
๏ Consistency of other information
In order to carry out the duties, the auditors have the following rights:
๏ Access to records
๏ Information and explanation
๏ Attendance at general meetings
๏ Right to speak at general meetings
๏ Rights in relation to written resolutions
๏ Right to require laying of accounts
Content of the audit report
- Title – addressing the report (usually the shareholders)
- Introduction – identifying what has been audited. Accounts are often published as part of a
larger Annual Report, not all of which is subject to audit - Respective responsibilities of directors and auditors – making it clear that directors are
responsible for producing the Accounts, whilst auditors are responsible for forming opinions
on them - Basis of Opinion – explaining how the audit work was done and the opinions reached
- Opinion – whether the Accounts are true and fair, and whether they have been properly
prepared - Date and Signature
Types of audit opinion
Unmodified
๏ True and fair
๏ Materiality
๏ Emphasis of matter paragraph
Modified
๏ Qualified opinion – arises when there is either a material misstatement of insufficient
appropriate audit evidence but it is not pervasive
๏ Adverse opinion – financial statements are not free from material misstatement and
therefore do not give a true and fair view
๏ Disclaimer of opinion – insufficient audit evidence and is pervasive.
Emphasis of matter paragraph
An emphasis of matter paragraph draws the attention of the shareholders to a specific event that usually occurs before the end of the year that will not be resolved until after the date that the audit report will be signed.
The event is important so the external auditor needs to highlight it by including an emphasis of
matter paragraph in the audit report. This usually goes before the opinion, refers to the note
prepared by the directors that is in the financial statement and states that the opinion is not
qualified in this respect.
Enunciate the consideration to be taken by an external audit report.
In preparing their report the auditors are required to consider the following: ๏ Compliance with legislation ๏ Truth and fairness of accounts ๏ Adequate records and returns ๏ Agreement of accounts to records ๏ Consistency of other information
Enunciate the rights of auditors.
๏ Access to records ๏ Information and explanation ๏ Attendance at general meetings ๏ Right to speak at general meetings ๏ Rights in relation to written resolutions ๏ Right to require laying of accounts
Describe the rol of financial reporting
The role of the framework is to:
๏ Assist the IASB in its development of future accounting standards and in its review of existing
accounting standards
๏ Assist the IASB by providing a basis for reducing the number of alternative accounting
treatments permitted by law and accounting standards
๏ Assist preparers of financial statements in applying accounting standards and in dealing with
topics that do not form the subject of an accounting standard
๏ Assist auditors in forming an opinion as to whether financial statements conform with
accounting standards
๏ Help users of financial statements to interpret the information contained in financial
statements prepared in conformity with accounting standards
๏ Provide those who are interested in the work of the IASB with information about its approach
to the formulation of accounting standards.
The framework is not itself an accounting standard nor can it override the requirements of any
existing accounting standard.
Describe the objective of financial statements
To provide information about the financial position, performance and changes in financial position
of an entity that is useful to a wide range of users in making decisions.
Underlying assumption: Going concern – the financial statements are prepared on the basis that an entity will continue in operation for the foreseeable future
Describe the fundamental characteristics of financial statements
๏ Relevance – to be useful, information must be relevant to the decision making needs of the
user. Information is relevant if it is material (size and nature).
๏ Faithful Representation – to be useful must faithfully represent the phenomena that it
purports to represent, which is only possible if accounted for substance and economic reality.
‣ Neutral – free from bias
‣ Complete – includes all necessary information, descriptions and explanations.
‣ Free from error – in the descriptions and processes the financial information is
produced
Describe the enhance qualitative characteristics of financial statements ojo!!
Enhancing qualitative characteristics
๏ Understandability – assuming users have a reasonable knowledge of business and a willingness to study information with reasonable diligence, the financial statements should be readily understandable to users.
๏ Comparability – users must be able to compare the financial statements of an entity from period to period and from company to company
๏ Timeliness - Information produced quickly makes it more useful as a basis for currentndecisions.
๏ Verifiability - Information needs to be supported by representation (either written or verbal) to allow us to confirm its validity.
Describe the elements of financial statements
๏ Asset is a resource controlled by the enterprise as a result of past events and from which
future economic benefits are expected to flow to the enterprise.
๏ Liabilities are an entity’s obligations to transfer economic benefits as a result of past
transactions or events.
๏ Equity is the residual amount found by deducting all liabilities of the entity from all of the
entity’s assets.
๏ Income is increases in economic benefits during the accounting period in the form of inflows
or enhancements of assets or decreases in liabilities that result in increases in equity, other
than those relating to contributions from equity participants.
๏ Expenses are decreases in economic benefits during the accounting period in the form of
outflows or depletions of assets or incurrences of liabilities that result in decreases in equity,
other than those relating to distributions to equity participants.
A measure of the elements of financial statements
๏ Historical cost – cash price or fair value at acquisition or obligation. Most commonly used
but widely criticised
๏ Current cost – what would be the cash price today
๏ Realisable value – what could be realised/satisfied today
๏ Present value – discounted future cash flows
Describe IAS1 components of financial reporting
IAS 1 sets out overall requirements for the presentation of financial statements, guidelines for their
structure and minimum requirements for their content.
Financial statements will present to the users of accounts:
๏ Statement of financial position
๏ Statement of profit or loss and other comprehensive income
๏ Statement of changes in equity
๏ Statement of cash flows
๏ Notes to the accounts
๏ Comparatives
Financial statements should provide a fair presentation of the results, which is achieved by
compliance with IFRSs.
