Chapter 9 - Aspects of Regulatory Framework for Accounting, the Annual Reports for Accounts for Companies, and Auditing

Question 1

The need for a Regulatory Framework

Answer 1

Financial Statements are not solely for the purpose of keeping accounts internally, but also to communicate to others, as enforced by law:

• by board of directors to owners and shareholders to show how well the organisation is doing, to explain how earnings were distributed and why not all distributable earnings will be handed in, to show why a particular project is feasible and of interest for the company;
• by the company to the HMRC to justify corporation tax, or another tax;
• by a sole trader to justify business activities and expenses, in order to make accurate self-assessment tax returns

Question 2

The Accounting Profession and a Regulatory Framework

Answer 2

There is a need for consistent principles, and there has been agreement that financial information must be presented in particular formats.

Question 3

The Regulatory Framework of UK Corporate Accounting - an overview

Legislation

Answer 3

Companies, Partnerships and Groups Regulations 2015. Give details about workability to the law, as well as following European Directive

Question 4

The Regulatory Framework of UK Corporate Accounting - an overview

Financial Reporting Standards

Answer 4

From January 2016 companies of any size have to follow these standards.

Question 5

GAAP

Answer 5

Generally Accepted Accounting Principles

Question 6

Financial Reporting Council

Answer 6

Independent body responsible for representing the UK in corporate reporting standards discussions with others.

Question 7

International Financial Reporting Standards (IFRS) and The International Accounting Standards (IAS)

Answer 7

Mandatory for listed companies, specially public ones, but can be voluntarily adopted by private limited companies

Question 8

The London Stock Exchange Rule Book

Answer 8

for publicly listed companies

Question 9

Company Law - Accounting Legislation

Answer 9

Many accounting rules are incorporated in Company Law, so they are legal and professional requirement.

Question 10

Companies Act 2006

Answer 10

Keep adequate accounting records to show and explain the company’s financial transaction and to show company’s financial position with reasonable accuracy.
Records must be kept for 6 years by a public company, and 3 by a private company.

Question 11

Companies Act 2006

Required Financial Statements

Answer 11

• a profit and loss account: the Income Statement, which will show the profit or loss made in a particular reporting period
• balance sheet: Statement of Financial Position, showing assets and liabilities of a company, and overall wealth of the company.
• cash flow statement: showing inflows and outflows of cash and reconciles operating profits
• director’s report: which is scrutinized by auditors to ensure it meets “true and fair view” expectations.
• auditor’s report: independent auditor appointed by shareholders to represent them examine and report on the information in the financial statements and director’s report. Their signed statement of importance for the company, but also for the credit managers.
• Notes to the accounts: explaining the content in further detail, providing justifications and decisions made.
• Group consolidated accounts: when parent company cannot clearly report on activities of all different companies it owns
• other reports and statements: such as Director’s Remuneration, Corporate Governance.

Question 12

Companies Act 2006

Required Financial Statements

Answer 12

Annual report and accounts need to be shown to shareholders and the Registrar of Companies to the least minimum levels of content required by law, or per shareholders requests.

Question 13

Companies Act 2006

Required Financial Statements

Answer 13

Not all set of reports and accounts need to be shown to every shareholder, in the following situations:

• parent company may not need to do so for other companies it owns.; subsidiaries can produce accounts to Companies Act
• company that meets the criteria to be qualified as “small”; copy sent to the Companies House must be the same as the one sent to shareholders
• there are exemptions for smaller companies
• dormant companies may ot need to produce details reports

Question 14

Private Companies Regulations

Answer 14

Private companies are not obliged by statute to hold an AGM, but the shareholders are entitled to receive a copy of the accounts.
And they can submit abridged accounts to the Companies House, depending on their size.

Question 15

Size Thresholds for medium sized companies

Answer 15

If it doesn’t exceed two or more of the following criteria:
Sales turnover: 36m
Balance Sheet total: 18m
number of employees: 250

Question 16

Key features of FRS 105 micro-entity financial reporting

Answer 16

• True and fair view
• Preparation of only 2 primary statements required: Statement of Financial Position and Income Statement
• Significantly condensed formats of statements
• Significantly reduced number of disclosures
• Simplified accounting treatment
• Fair value and revaluation accounting not permitted
• no accounting policy choices
• more helpful guidance

Question 17

Key Features of FRS 102 Section 1 Small Entity Financial Reporting

Answer 17

• True and Fair View is not presumed
• Preparation of only 2 primary statements required: Statement of Financial Position and Income Statement
• Significantly abridged formats of statements
• reduced number of mandatory disclosures as Notes to the Accounts
• Simplified accounting treatment of more complex issues
• Accounting policy choices, including fair value and revaluation accounting, and mandatory disclosure needed
• helpful guidance
• not all company law requirements are reproduced
• FRS 102 consistent terminology

Question 18

Cash Flow Statement

Answer 18

Not required by small or micro companies.

It reconciles the balance cash recorded in current assets in one year with that shown in the following year

Question 19

Director’s Report

Answer 19

Can provide additional useful information for the credit manager.
This report is audited and will provide facts about the company’s performance.
Larger companies the report may refer to subsidiary reports prepared by executive directors.

Director’s report must include:

• business review of the year’s activities, its developments; with the main risks and uncertainties, as well as key performance indicators
• financial review including taxation and capital. Financial info for the benefit of shareholders and other interested entities.
• review of operations
• company’s financial performance during and financial position at the end of the year including proposed dividends, changes in equity
• details of shareholders and shareholding
• principal activities that have impacted the results
• major developments
• post statement of financial statement events
• research and development
• changes to non-current assets
• details of political and charitable activities
• overview of employees and employment policy
• names of directors
• changes to the board of directors
• acquisitions
• supplier payment policy (credit terms)
• auditors appointed by the board

Question 20

Chairman’s Statement

Answer 20

Subjective review of the major activities and events of the past year. It’s not mandatory to the Annual Reports and it’s not scrutinised by the auditors.

Question 21

Internal Auditing

Answer 21

Either employees of the company, or can be outsourced.

Appointed by management to provide an independent appraisal of the company

Question 22

Work of the internal auditing

Answer 22

• review the design and functioning of the accounting system
• examining the information provided to see if it’s reliable and complete
• reviewing implementation of management policies

It is important where a it’s difficult for management to supervise and control all activities of the business.

An internal audit is a non-statutory audit, i.e. not required by law

Question 23

External Auditing

Answer 23

Employees or partners of an independent professional accountancy firm and are engaged by the management of public and private companies.

• They form an opinion of the company’s annual accounts, as if they were properly prepared in accordance to the Companies Act and with the correct framework and standards
• that accounts give a true and fair view of the company’s state and its profit and loss for the year
• report their findings to shareholders in a formal report

Question 24

External auditing

Answer 24

Submitting accounts to shareholders and to the Registrar of Companies is a legal requirement for private and public company, unless they qualify for audit exemption.

Question 25

Annual Report

Answer 25

For companies that are subject to audit, it must contain the auditor’s report.

Financial Statements and a report are to be submitted to the Shareholders at the at AGM.

Question 26

Statutory Audit

Answer 26

Independent auditor needs to report financial statements to shareholders; and this is required by law.

Question 27

Financial Statements (production, who for and analysis)

Answer 27

Directors are responsible for producing the financial statements.
These are then examined by an independent auditor appointed by the shareholders, and they will providing their opinion as to whether it is a ‘true and fair view’

Question 28

Auditor’s report to the Directors - non-statutory report

Answer 28

It communicates points that have arisen during the audit, such as:

• design and operation of accounting and internal control system and improvement suggestions;
• offer constructive advice on potential economies or improvements in efficiency
• specific comments of the financial statements and the particular use of accounting policies and practices

Question 29

Auditor’s Report to company members/shareholders - statutory report

True and Fair View

Answer 29

It is the auditor’s responsibility to include an opinion as to whether accounts show a true and fair view, and if they have been prepared in accordance with the Companies Act 2006 within the the acceptable bases and conventions.

This opinion is, however, not a guarantee that the accounts are free from errors or fraud.

Because there are a certain amount of ways and policies that are acceptable, but each will come to different results, the auditor doesn’t have to certify that the accounts are correctly prepared.

‘True and Fair view’ is a subjective concept, but all is all it means that the company complies with the best professional practices.
That means this concept will change, as the policies change.

Question 30

Statutory Auditors’ Report (Companies Act 2006)

Answer 30

Most reports will be unqualified/clean and will include:

• general statement on the preparation of the report
• distinction between the directors’ and auditors’ responsibilities
• basis used to carry out the audit (i.e. in accordance with Auditing Standards)
• an express opinion of a true and fair view

Question 31

Statutory Auditors’ Report

it is implied that

Answer 31

• proper records have been kept
• the financial statements agree with the accounting records
• all information for the audit has been obtained
• information in the directors’ report is consistent with the accounts

Question 32

Auditors’ Report

Qualified opinion

Answer 32

• When auditors disagree with the treatment of the disclosure of an item in the financial statements, and the auditor doesn’t think it provides a true fair view. This may be due to the use of inappropriate, accounting treatment or disclosure, the actual accounts or facts, or failure to comply with the accounting requirements.
• there is a limitation on the scope of the auditor’s examination: type or quality of evidence provided, or insufficient evidence. Not all accounting records being made, or directors’ preventing the ‘testing’ procedure requested by the auditor.

When giving a qualified opinion, auditors must consider uncertainties about the outcome of future events and their potential financial effect.

Question 33

The importance of a clean audit report to the organisation

Answer 33

If the auditor doesn’t give a clean report, than it is said to be qualified.

The negative points for the company are:

• less reliance on the business for potential lenders, even possibly affecting the share price
• may reflect badly on the directors of the company
• may cause legal restrictions in the amount of dividend the company is able to pay

Question 34

The importance of a clean audit to the credit manager

Answer 34

Shareholders and potential lenders use the Financial Statements to see how much reliance they can have in the company, therefore if there is a clean audit report, it means they can trust those Financial Statement for decision making.
It means there is a true and fair view and of its profit for the year.
It also means that accounts have been kept correctly.

A qualified report should warn the credit manager there areas that need to be looked into and improved.