- Content of Financial Statements
It is important that you are clear as to exactly what the financial statements consist of under modern accounting practice.
They comprise the following:
a) The primary statements
i) Balance sheet
ii) Income statement
iii) Statement of changes in equity
iv) Cash flow statement
v) The notes to the accounts
b) The directors' report
c) The auditor's report.
The main principles underlying the preparation and presentation of company financial statements are now set out by the International Accounting Standards Board's document Framework for the Preparation and
- Presentation of Financial Statements
- Presentation of Financial Statements
The major points from this document are summarized below:
1 The elements of Financial Statements
The starting point here is definitions of assets and liabilities. The other elements are then defined in terms of these.
Assets are rights or other access to future economic benefits controlled by an entity as a result of past transactions or events.
Liabilities are obligations of an entity to transfer economic benefits as a result of past transactions or events.
Owners' equity is arrived at by deducting liabilities from assets (capital = assets - liabilities).
Gains and losses are determined in terms of increases and decreases in owners' equity.
2 Recognition in financial statements
Recognition essentially means the recording process. The principles here address such questions as when is it acceptable to recognize (record) an asset or liability and when should assets and liabilities be de-recognized (no longer recorded in financial statements). The main points to note are:
Assets and liabilities should be recognized when there is evidence of their existence and they can be reliably measured. They should be derecognized when the right (assets) or obligations (liabilities) no longer exist.
The Timing of Audit Procedures:
Whereas tests of control can be (and usually are) performed by the auditor before the client's year end - at the so called interim audit stage - Substantive Audit Procedures and verification work will be performed primarily at or very soon after the client's year end, as these procedures normally rely on the availability of draft financial statements.
Verification of the individual assets and liabilities by the auditor extends into the post balance sheet period (i.e. the period between the year end date and the date of approval of the financial statements). The auditors will use this to their advantage when seeking to verify amounts stated for contingent liabilities, and for post balance sheet events.
- SUBSTANTIVE PROCEDURES
Substantive procedures are performed in order to detect material misstatements at the assertion level (Like; occurrence, completeness, accuracy, valuation, existence, rights and control), and include tests of details of classes of transactions, account balances and disclosures and substantive analytical procedures.
Nature of Substantive Procedures
• Tests of details are ordinarily more appropriate to obtain audit evidence regarding certain assertions about account balances, including existence and valuation.
• Analytical procedures are applied on large volume of transactions, which are predictable over time. (Cost of goods sold, payroll, sale)
Timing of Substantive Procedures
Year end substantive procedures are always more reliable
In considering whether to perform substantive procedures at an interim date the auditor considers such factors as the following:
• The control environment and other relevant controls. (Like payroll disbursement)
• The availability of information at a later date that is necessary for the auditor’s procedures (Provision for doubtful debts can be investigated interim but debtor and inventory can be verified at the year end).
• The objective of the substantive procedure.
• The assessed risk of material misstatement (Prefer always at year end).
• The nature of the class of transactions or account balance and related assertions (Like frequency of occurrence of the transactions e.g. salaries are paid monthly whereas bonuses are paid annually).
• The ability of the auditor to perform appropriate substantive procedures or substantive procedures combined with tests of controls to cover the remaining period in order to reduce the risk that misstatements that exist at period end are not detected (Staffing problem that cannot make the auditor able to extend till the year end) If substantive procedures are performed at an interim date, the auditor may sometimes consider applying tests of controls also on the transactions of remaining period while extending his substantive procedures from interim date to the period end.
Extent of performance of substantive procedures
Greater the risk of material misstatement due to weaknesses in the system of internal control, the greater would be the risk of material misstatement in the financial statements. In designing tests of details, the auditor may use either audit sampling or may choose to select items to be tested by some other selective means of testing.
