Lesson 6 Financial Reporting + External Audit Flashcards
Why prepare Financial reports
Financial reports are prepared for key stakeholders including
Investors - to assist in Buy/Sell decisions
Creditors - interested in the security of their debt
Suppliers - to understand the company’s ability to pay for goods and services
Employees - to understand the security of their employment
Customers - to understand the company’s ability to provide their goods and services
Governments - to assess company’s taxation
Regulators - to assess whether company is complying with laws and regulations
Public - to understand and participate in the local economy
Requirements for financial reporting
The companies act of 2006
Requires every company to keep adequate accounting records
Which are sufficient to
- Show and explain the company’s transactions
- Disclose with reasonable accuracy the financial position of the company
- Enable directors to ensure that any accounts required
Comply with requirements of CA 2006 and International Accounting. Standards.
Statements required within financial statements per Companies Act - listing disclosure requirements
Per CA 2006 listed companies are required to
Adopt a ‘Going concern’ basis of accounting - which is based on the directors assessment of the prospects of the company
This will include a VIABILITY STATEMENT
(Required per Listing disclosure guidance and transparency rules LR 9.8)
Accounting standard
IFRS and IASB provide a common global language for business affairs so that a company accounts are understandable and comparable across international boundaries
UKCG Code and Financial Reporting
Board should establish formal and transparent policies and procedures to ensure independence and effectiveness of internal and external functions
Board should present a fair and balanced and understandable assessment of company’s position
Board should state whether it’s appropriate to adopt the going concern basis of accounting and identify any material uncertainties
Investor confidence- ways in which companies can misreport its financial position
1-adopting accounting policies that give a more flattering picture of the company’s position
2-claiming revenue of profits earned earlier than they should have
3- taking debt off the company’s balance sheet
4- disguising money from loans as income
5- over valuing assets
Requirements for establishing Audit committee
Per UKCG code the board should establish an audit committee
All independent non executive directors
With minimum membership of 3
Chair must not be chair of board
At least one member must have relevant financial experience
The committee as a whole shall have competence in the sector
Explain the role of Audit committee
1- monitor the integrity of the financials
2-assess whether annual report is fair and balanced, understandable, contains necessary info for shareholders to assess company
3- review company’s internal financial controls and internal control and risk management systems
4-monitor and review the effectiveness of the company’s internal audit function
5- appointment/ removal of external auditor
6- review and monitor external auditors independence and objectivity
7- review the effectiveness of external auditor
8- Develop and implement a policy on engagement of auditor for non audit services
9-report to the board on how it’s discharged it’s services
Relationship between Audit committee and the Board
Raise significant issues to board
Recommend appointment or reappointment of external auditor to shareholders
Assess effectiveness of internal audit
Provide feedback on audits conducted by internal audit
Relationship Audit co and shareholders
Consider the clarity of reporting and be prepared to meet investors
Develop report describing the work of audit committee for inclusion in Annual Report
Audit Co Reporting (FRC guidance)
Summary of the work of Audit co
Composition audit co, names and qualifications of members
Number of Audit co meetings
Explanation of how Audit co performance evaluation was conducted
Explanation of how effectiveness of external audit process was assessed
Explanation of approach taken to appoint / re appoint the external auditor
Current partner name, number years in role
Timing of past tender and plans / timing for retendering
Specify if external auditor provides non audit services
Specify external audit fees
Role of CoSec in Audit co
1-develop TOR
2-advise on composition
3-conduct induction training
4- develop activities calendar
5-ensure sufficient resources
6-assist in understanding current and emerging issues
7-source advice from external experts
8- organize professional development
9-organize annual performance evaluation
10-draft internal audit report for inclusion in annual report
11-corporate secretariat services
Role of external auditor
1-provide expert indep. advice (true + fair view of position)
2- advice on compliance with relevant laws
3- for listed companies review compliance with UKCG code
4-provide opinion on compliance with law and accounting standards and whether accounts represent true and fair picture of company
Audit Reports -
modified vs unmodified
Unmodified- company’s financials are represent a true a fair assessment of the company’s financial position
Modified - implies there are potentially grave concerns about financial state and financial condition of company. Implies the external auditor could not agree on the application of accounting policy
3 types of modified audit reports
1- qualified opinion
In opinion of auditor financial statements provide a true and fair assessment of the company’s financial position EXCEPT for a particular matter
2- adverse opinion - the external auditor considers there to be MATERIAL MISSTATEMENTS
3- disclaimer - external auditor has been UNABLE to obtain info needed to give audit opinion
