Financial Reporting to Shareholders (+ auditors) Flashcards
Who are the 8 users of a company’s financial reporting and why are they interested?
- Potential investors – interested in the ability of the company to generate net cash flows
- Creditors – interested in the amounts, timing and uncertainty of cash flows
- Suppliers – interested in the entity’s ability to pay a debt for goods or services
- Employees – interested in sustainability and profitability (to pay wages)
- Customers - interested in ensuring the continued supply of goods or service
- Governments - interested in determining and applying taxation
- Regulators - interested in whether company is complying with all of the laws, regulations, standards and codes applicable to it.
- Public - interested in company’s ability to continue participating in the local economy
What are the CA2006 requirements for financial reporting?
Whose responsibility is it to sign off on the accounts that they give a true and fair view?
What does this mean?
What are the consequences?
Requires every company to keep adequate accounting records which are sufficient to:
a. show and explain the company’s transactions;
b. disclose with reasonable accuracy the financial position of the company at that time;
c. enable the directors to ensure accounts prepared comply with the requirements of the CA2006 and IAS
- Directors
= means that the directors must only approve the accounts if they are satisfied that the accounts show a true and fair view of the financial position of the company
= must not approve and sign off accounts unless they are satisfied they give a ‘true and fair’ view = To do so is a criminal offence
What is a viability statement required by Listing Rules?
What are the Disclosure, Guidance and Transparency Rules for financial reporting? (2) (auditors)
Viability statement = included in annual report on the appropriateness of adopting the going concern basis of accounting and the directors’ assessment of the prospects of the company
Chapter 4 DTRs = requires financial reports to be audited and for the auditors to be registered with the FRC’s Professional Oversight Board
What does Principle M UK CG Code require boards to do via their AC for financial reporting?
What does provision 27 UK CG Code require directors to do in the annual report?
What are the 4 things listed companies must state in their annual and half-yearly financial statements under provision 30 and provision 31 (long-term viability statement) UK CG Code?
- Principle M = requires boards via their AC to establish formal and transparent policies and procedures to satisfy themselves on the integrity of their company’s financial statements
- Provision 27 = Directors required to explain their responsibility for preparing the annual report and accounts
- Provision 30 = Whether it considers it appropriate for the company to adopt a going concern basis of accounting when preparing the financial statements.
- Provision 30 = Whether there are any material uncertainties, and if so, to identify them over the last 12 months
Long-term viability statement:
- Provision 31 = Taking into account the company’s current position and principal risks, how it has assessed the prospects of the company
- Provision 31 = Whether it has a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due
Name 4 ways a company can misreport their financial numbers to improve its financial position.
- Adoption of accounting policies that give a more flattering picture of the company’s position.
- Claiming that revenue or profits were earned earlier than it should have.
- Taking debts off the company’s balance sheet (Enron)
- Over-valuing the company’s assets
Which companies must have an AC?
Which UK CG provision lists the main roles and responsibilities of the AC?
Under the UK CG Code, where must the AC describe its work?
Where does the FRC Guidance on Audit Committees say the main role and responsibilities of the AC should be set out?
What does the FRC Guidance on Audit Committees say the AC and board should review annually?
DTR 7.1 = listed companies are required to establish an audit committee
(DTRs are mandatory = not comply or explain)
- Provision 25 lists the main roles and responsibilities of the AC
- Provision 26 = describe its work in the annual report
main role and responsibilities of AC should be set out in written terms of reference tailored to the particular circumstances of the company
AC and board should review annually the effectiveness of the AC
What are the DTR composition requirements of an AC? (3)
- DTR 7.1 = requires AC of listed companies be comprised of:
1. a majority of independent members, including the chair;
2. at least one member with accounting and/or auditing experience;
3. members who have the competencies relevant to the sector in which the listed company is operating in
What are the UK CG Code composition requirements of an AC? (4)
- Provision 24 = minimum of 3 independent directors, 2 for companies below FTSE350;
- one member should have recent and relevant financial experience;
- members have relevant competencies to the sector in which the company operates
- Board chair should not be a member
How often should the AC meet in a year according to the FRC Guidance on Audit Committees?
Who should be present at the meeting?
Should management always be present?
at least 3 meetings during the year, held to coincide with key dates within the financial reporting and audit cycle
- Only AC chair and its members should be present at its meeting, others should be in attendance when invited by AC
- AC should meet the external and internal auditors, without management, at least annually, to discuss any issues arising from the audits
Name 5 things the cosec would typically be involved in in relation to the AC. (or any committee!)
- Develop Terms of Reference and annual calendar of activities
- Advice on appropriate composition
- Ensuring committee has sufficient resources to carry out its role e.g., access to external independent professional advice
- Organising inductions and annual evaluation of committee
- Assist drafting committee report to be included in the annual report
What is the role of the external auditor? (3)
- to give an expert and independent opinion on whether the financial statements give a true and fair view of the financial position of the company
- to give an expert and independent opinion on whether the financial statements comply with the relevant laws and accountancy standards
- review company’s compliance with 2018 UK CG Code
What are the 2 types of auditor opinion?
- unmodified = auditors state the financial statements give a true and fair view
- modified = serious issue and implies
a. there are potentially grave concerns about the financial statements and the financial condition of the company
b. auditor and board couldn’t agree on the application of accounting policies and hence the content of the financial statements
What are the 3 types of modified audit opinion?
- A qualified audit opinion = the financial statements would give a true and fair view except for a particular matter, which the external auditor explains.
- An adverse opinion = there are material mis-statements in the accounts and that these are ‘pervasive’.
- A disclaimer of opinion = external auditor has been unable to obtain the information that they need to give an audit opinion
What are the 5 possible threats to auditor independence identified by the International Federation of Accountants (IFAC)?
- Self-interest threat = an auditor or audit firm is earning such a large amount of fee income from the audit and non-audit work that its judgement will be affected by a desire to protect this income stream
- Self-review threat = Audit firm conducts non-audit work for company and has to check the firm’s own employees work
- Advocacy threat = Audit firm is asked to give its formal support to the company by providing public statements or supporting the company as part of litigation
- Familiarity threat = Auditor becomes familiar with a company or one of its directors through a working association over time (= too trusting and don’t check)
- Intimidation threat = An auditor may feel threatened by the directors or senior management of a company
What are the 6 measures to protect auditor independence against the possible threats?
- Appointment by shareholders =CA2006 provides appointment of auditor and their remuneration should be approved by shareholders at GM
- Restricting or prohibiting non-audit services
- Assessment of independence of audit firm employees = AC has responsibility for reviewing and monitoring the independence and objectivity of the external auditors
- Rotation of audit partner or audit firm
- Requesting that the auditor make public statements on behalf of the company = AC should monitor what statements they are being asked to make to avoid the audit firm carrying out an advocacy role on behalf of the company
- Management intimidation = AC should meet with external auditors at least annually without management
