LECTURE 6 – TRUE AND FAIR VIEW OF FINANCIAL STATEMENTS.

LECTURE 6 – TRUE AND FAIR VIEW OF FINANCIAL STATEMENTS.

 

Good morning friends once again………….

It is my initial try to make the subject of audit for the CA and other professional students, as simple as possible…… and once again thank you very much to all my readers that they have given me good response on this website……..

Now concentrate on the today’s discussion.

 

Think that what is main objective of audit???

Your answer will be —- provide the opinion about the TRUE AND FAIRNESS of financial statement of organization.

 

But here still the question is that what are the parameters which decides such true and fairness??????

And you will be surprised that our great institute has asked this question in the examination many times.

 

When I was CA student then I was also confused that which statements provide the true and fair view??????

After the deep analysis I have found the way to give the answer.

In this type of question we have to write the main points which auditor should keep in to consideration during his audit process.

 

I know that last sentence is little more tricky to understand………… so now concentrate here to understand it……..

 

Think all of you that with the blessings of your parents and god you have passed your CA. Now you are authorized to put CA as prefix in your name. You have decided to join practice instead of joining industry.

 

Now you have appointed as an auditor of one of the reputed company.

Now give the answer of following questions…….

 

1. 1.     During the process of audit you have found that company has purchased one HONDA CIVIC car of Rs. 10 Lacs and entry has been passed as expenses in to the profit and loss account.
   1. a.     Does financial statement give true and fair view??
2. 2.     In the current financial year company has incurred loss of Rs. 25 Lacs due to huge fire at company godown BUT company has shown such losses under the other normal losses in profit and loss account.
   1. a.     Does financial statement give true and fair view??
3. 3.     In the current financial year company received government subsidy of Rs. 50 Lacs which shown in the profit and loss account as other operating income.
   1. a.     Does financial statement give true and fair view??
4. 4.     Secured loan received from state bank of India amounting Rs. 75 Lacs shown as unsecured loan.
   1. a.     Does financial statement give true and fair view??
5. 5.     In the current financial year due to having less profit, depreciation amounting Rs. 10 Lacs has not been ptovided.
   1. a.     Does financial statement give true and fair view??
6. 6.     Advance received from customer amounting Rs. 25 Lacs for the next financial year has been stated Sales of current financial year.
   1. a.     Does financial statement give true and fair view??
7. 7.     Some information which should be stated in to financial statement statutorily has not been disclosed properly.
   1. a.     Does financial statement give true and fair view??

 

 

I hope that you know the answer of all those questions. Each question contains the answer NO. but why??

 

Reasons are as follows.

1. 1.     Here the HONDA CIVIC car is fixed asset which should be shown as fixed assets in balance sheet and not as expenses in the profit and loss account. Only depreciation is allowed as expenses. Here the profit is under valued by amount of Rs. 10 Lacs.
2. 2.     In this issue though the journal entry has been correctly passed but the disclosure is not properly made. Means loss due to fire including huge amount require separate disclosure because it influences the decision of reader (REMEMBER THE CONCEPT OF MATERIALITY). It should not be shown under the other normal loss.
3. 3.     Same as above government grant is not the other operating income but it is a special income, so separate disclosure is required.
4. 4.     In this case reader are assuming that the loan acquired is free from any charge or mortgage. But it is not in reality. So financial statement does not give true and fair view.
5. 5.     Depreciation should be compulsorily provided. Not providing depreciation profit is overvalued by Rs. 10 Lacs.
6. 6.     In the financial statement only current year’s transaction should be shown. Advance received from customer should not be shown as sales but it should be shown under the current liabilities as advance received from customer.
7. 7.     All statutory information which required to be shown in the financial statement must be shown. For example required of Schedule VI and Section 209 of the Companies Act, 1956.

 

Auditor should use compliance and substantive procedures for assessment of truthness and fairness of financial statement.

 

When auditor finds such issues which do not provide true and fair view in financial statement, he should inform management for adjustment. If management refuses for adjustment then auditor should issue qualified report (Remember lecture no. 5 – Types of auditor’s Report.)

 

 

In the company organization auditor is a mediator between the shareholders and the management. In the audit report auditor conveys the readers or users of the financial statements that whatever is presented in to the financial statements of the company by the management is true and fair to the best of his knowledge and according to the information and explanation provided to him.

 

In sort after reading the audited financial statements user can assume that whatever is presented in to the balance sheet is also available and in existence in the company though they have not seen it.

 

For example in the balance sheet fixed assets have been shown by Rs. 5000000 then reader assumes that these assets are available in reality in company.

 

Following are main parameters which auditor should verify for deciding true and fairness of financial statements of company.

 

• Ø all the transactions and items in the financial statements

–         properly recorded

–         correctly recorded

• Ø All the accounting policies of accounting have been applied with applicable accounting standards.
• Ø Distinction of transaction has been made properly between the capital and revenue transactions
• Ø All abnormal, nonrecurring, extra ordinary transactions are shown separately.
• Ø Assets and liabilities are properly valued and presented.
• Ø Depreciation on fixed assets provided.
• Ø Current year’s transaction has been shown in the current year only.
• Ø All statutory requirements in the financial statements has been complied with. (Requirement of the Companies Act,1956 and Schedule VI)

 

If financial statement of company is not complied with such criteria then we can say that financial statement does not provide true and fair view.

OK friends here we have discussed the concept of true and fair view of the financial statement I hope it will be very helpful to you in your concept clarity. In the next lecture we will discuss about

• Ø Audit papers
• Ø Detection of frauds and errors
• Ø Accounting policies