Week 1: Conceptual Framework & IAS1 Preparation of Financial Statements Flashcards
What is profit?
Profit is the excess of income (revenue) over expenditure. When expenditure exceeds income (revenue), the business is running at a loss.
whats the main difference between financial vs managemnt accounting??
The main difference is financial accounting focuses on providing histroical information while management accoutning is more about the future.
What is corperate governance?
Corporate governance is the system by which companies are directed and controlled’ (Cadbury Report, 1992)
Why is corporate governance important?
Corporate governance is important because of the conflict that arises between owners and management.
Management are employed by a company’s owners (its equity shareholders) to manage the company on their behalf; therefore they are agents for the equity shareholders (who are the principals)
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However, management have difficulty making decisions, which though in shareholders’ best interests, may damage their own interests.
This conflict is referred to in the relevant literature as ‘agency theory’
What is an audit?
An audit is the work performed by auditors (independent experts - so they can provide an informed professional independent opinion on whether financial statements portray a true and fair view, and that is all.
The financial statements of limited companies are required by the Companies Act 2006 to give a true and fair view of the company’s financial position at the reporting period date and of its profit or loss for the reporting period.
Financial statements provide a true and fair view if they contain sufficient information (in quantity and quality!) to satisfy the reasonable expectations of the users of the financial statements.
What is the objective of an audit?
The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are well prepared, in all material respects, in accordance with an applicable financial reporting framework’ (ISA 200, 2018)
What is an auditors report with a postive opinion called?
An audit report with a positive opinion on a company’s financial statements is called an unmodified, unqualified, or a clean audit report.
what are the two types of modified audit reports called?
There are two types of modified audit report (also called adverse opinions, or qualified audit reports) those where: (1) matters arise that do not affect the auditor’s opinion; and (2) matters arise that do affect the auditor’s opinion.
There is only one type of modified audit report that can also be regarded as clean and that is when the auditor wants to emphasize some matter to the reader of the financial statements.
What is the expectations gap between what aduitors do and what the public think they do?
The expectations gap is the gap between the auditors’ role and opinion and the public’s perception of the auditors’ role.
Many members of the public believe that auditors are looking for fraud when they undertake an audit, that auditors say the financial statements are accurate, that the auditors are responsible for the financial statements and that auditors should give warnings about the future of the entity when they suspect it is going to fail.
The audit report does not say the financial statements are correct.
Auditors only check a sample of transactions not every transaction, therefore, they cannot guarantee that fraud will be detected.
An audit does not guarantee that a company will succeed in the future.
Management are responsible for the financial statements that they prepare, or that are prepared on their behalf.
Management are also fully responsible for the running of the company
