Professional Documents
Culture Documents
Financial Reports
Chairmans Report Financial Statements
Income Statement Cash Flow Statement Statement of changes in Equity Balance Sheet Notes
No frauds No window dressing Properly audited Compliant with laws/ rules/ practice
Control Function
Planning
Shares Bonds
Acquisitions Mergers
Key Issues
Why would management want its financial statements to be untrue? Consequences of unreliable financial statements Role & independence of external auditors How can reliability be assured?
Misleading Statements
Deliberate false picture of the company Improper accounting policies
Revenue and expense recognition Capital and revenue expenditure Income and liability distinction
Book revenue before earning it to increase profits Defer revenue to reduce profits Defer expenses to increase profits Make unreal provisions to reduce profits
Expense recognition
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Managements Role
Management draws accounting policies, keep accounts and prepares financial statements. Management has most to gain or lose from the defects of financial statements Hence, management needs highest degree of monitoring in this aspect.
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Rotating them regularly Not giving them any other business Granting them full access to all records Limiting their relationship with management
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are in accordance with the records reflect a true and fair view of the profit & position comply with the laws
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Basic responsibility to prevent and detect errors/frauds lies with management, not external auditor.
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Auditors Liability
No liability to outsiders
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Non-Audit Work
Taxation Investigations (for acquisitions, etc.) General consultancy on new projects Systems development Low-balling
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Managing Position
To meet rules and regulations To meet lenders covenants To portray better picture to public
Keep assets or liabilities off balance sheet Window dressing Misclassification of items
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Earnings Management
To keep share price stable, or rising To meet market expectations To maintain dividend payout pattern Smoothening needs
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Creative Accounting
Standards do not cover every thing. There is always more than one correct way of handling things Legitimate and dishonest intentions Outright fraud: double set of books
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Directors Responsibilities
To prepare accounts To prepare directors report
Balanced and understandable assessment State of affairs; going concern Outline directors expectations
Voluntary Disclosures
Future events or plans Changes in administration or policy Achievements Concerns
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Internal Audit
If formal internal audit department exists, it reports to Audit Committee. If no formal internal audit department exists, Audit Committee can recommend establishment of one, or suggest other measures.
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Verifies suitability of the external auditor Their resources, qualifications, independence, past record Linkages, non-audit work Rotation, former employees of audit firm Audit firms performance, ethics
Ensures independence
Audit Cycle
Audit plan / internal / external Discussion of audit plan with auditors Contact during audit Review of findings, major issues Oversee all correspondence with external auditors
AC and whistleblowing
In absence of any other formal avenue, Audit Committee may handle whistleblowing cases. Set up process of handling these cases. Set up mechanism for investigation and follow up.
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Thank you
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