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Monday, December 7, 2015

Earla Riopel's New Business and Personal Website

Earla Riopel and Related Sites
Recently invested on a website:
It’s mostly for freelance writing, accounting and business related work.

This Blogger site will still carry most of my daily networking activities links.

Earla Riopel, BSCom (USA), DipAcc (UBC)

Thursday, December 6, 2012

Financial Statements Reporting - Error Correction

Being creative, inserted few photos from thousands of beautiful photos taken by me, along with my current favorite book and  iPhone5
Why the need of financial statements reporting error corrections 

Availability of advanced technologies, hiring the most skilled and experienced personnel for your accounting department will help eliminate financial statements “most” reporting errors. I purposely used the word “most” instead of “all” for a reason. We know that it is quite impossible for any company to have a perfect accounting system especially for mid-sized and large companies, the more complex the company is, the more complex the accounting system would be. It is just in a matter of time, mistakes and errors could occur while preparing its financial statements. As the saying goes, “no one is perfect”, we are humans that use equipment as tools to do a task, and there will be few situations that we input the incorrect information which the computer program will process and likely will provide us an incorrect output. This is when we need the help of trained personnel to find these errors and correct them. It can be you as the financial statements preparer or it can be another party, an internal auditor or external auditor.

How to correct financial statements errors and who to ask for help

As to financial statements preparer, you do not have to feel awkward when your books are to be audited or reviewed by an internal or external auditor. You should be thankful every time when there is a review or an audit for your company, since an independent auditor will help you to locate any financial statements mistakes, errors and even misstatements that you might have missed.

It does not matter how small or big your company, or the company you are working for, either for-profit or not-for-profit organization (NPO), don’t be surprised if your work will be audited or reviewed one day. If it makes you feel better, I had been on both sides, as a reviewer for non-for-profit organizations, and as a treasurer/bookkeeper. My treasurer/accounting work was reviewed by an independent reviewer. Likewise, I review other NPOs financial statements, as part of their internal control system. I thought it was an exciting part of my voluntary work.

Anyway, back to auditing of for-profit companies, especially public companies, which usually required a financial statements audit. An audit is to make sure that the company’s management (financial statement preparers) prepared the company’s financial statements in accordance with the generally accepted accounting principles (i.e. US GAAP, IFRS).  The management is responsible for the preparation and accuracy of the financial statements, whereas, the independent auditor is responsible for conducting the audit in accordance with generally accepted auditing standards (GAAS).  Usually at the end of the audit field work, an auditor report is provided to the audit client.

Most of the time, a company requires its financial statements audited as a requirement for the company, especially for a public company. Auditor’s report provides reasonable assurance to current and prospective shareholders, creditors and other related parties that the financial statements are free from misstatements and errors.  In a way, an audit gives credibility to company’s financial statements, management prepared them in accordance with US GAAP or/and IFRS whichever case applies to the company.

Accountants have to go through to unbelievable length of professional educational training and acceptable working experienced in order to provide clients the best possible professional service expected from licensed designated accountants/auditors. As you may have read, past and current accounting firms, big or small can be sued and be held liable for improper auditing practices. Even an intern/student can make his/her accounting firm that he/she works get sued. 

Commonly, the cause of it is improper auditing practices, requirement and procedures that were not followed by the auditing team. One of these auditing requirements is the involvement and proper supervision by at least one licensed, designated, experienced senior partner/auditor of the firm, depending on the complexity of the audit. The work of an intern has to be supervised from start to the final stage of the audit.

It is quite a responsibility to be involved with the preparation or the audit of financial statements. Either you are the financial statements preparer or an auditor, both have to be trained in locating, correcting or recommending, performing corrections for all financial statements mistakes, errors and misstatements. Though it is the responsibility of the client’s management to correct these errors, but as an auditor, it is your responsibility to locate, recommend correction, and make your audit report. So really, to become a good auditor, you have to be a good bookkeeper, accountant, or financial statements preparer.  

Hopefully, after the lengthy explanation of how errors on financial statements reporting can affect decision-makers/users of financial statements, you still want to hear what happened with my last FAR exam review session.

Learned on Basic Theory and Financial Reporting – Error Corrections

Module 9 of the Wiley’s textbook has good explanation and illustrations for the topic of error corrections on financial statements reporting. The most important to remember in this topic is on how to find the errors, and how to be able to correct them.

The one thing that helps me understand error correction is by remembering what I learned in the preparation of financial accounting statements,  from sourcing of documents and related information to journalizing, posting to trial balance and general ledger, performing year-end adjusting entries and correction of errors, and lastly the presentation of accounts to respective financial statements.

In addition, the application of auditing procedures can be used as well, tracing information backward, from financial statements to source documents and related information in locating errors and correcting them or vice versa, tracing information from source documents to the financial statements.

After reading the textbook, combine it with what I learned in the past, the best way to deal with financial statements error corrections for MC and TBS is by answering these "five questions" procedures:

(1)   What is the accounting error?
(2)  When did the accounting error occur?
(3)  Which financial statements accounts are affected?
(4)  What are the accounting principles to be applied in correcting the errors?
(5)   Does the error correction make sense?

Answering multiple choice (MC) questions, task-based simulation (TBS) problems.

Though this topic has short reading materials, fewer multiple choice questions and task-based simulation problems, but it has enough to give you what you need to solve error corrections questions and problems.  

Answering Multiple Choice (MC) Questions:

As to answering multiple choice questions, the above listed “five questions” procedures helps me in answering these MC questions. I noticed that even the MC questions that did not require any calculations I still have to create a scenario, making formula templates, using “example amounts” to answer quantitative questions. I know, for someone who does this for a living in a full-time basis, you might not need this, once you know which account needs error correction, you know right away which financial statements accounts are affected.

The most important to remember in error corrections MC number crunching questions are the application of the above listed “five questions” procedure, which include restatements of prior year financial statements affected, the tax effect and adjustment to the Retained Earnings.

Answering Task-based Simulations (TBS) problems:

There are only a few TBS in this topic (error correction) in this textbook.  However, there is one TBS that is a very good example problem. It is quite lengthy and it is unlikely that will be given in a CPA exam scenario, maybe partly or shortened, since seven TBS are tested during FAR exam. But still, it is a very good TBS problem to know well. 

How I did with this TBS problem? Not as good as the textbook answer! Thinking that I can answer this type of question by doing a shortcut, using the “BASE” format: B (beginning balance) –A (additions) –S (subtractions) –E (ending balance) calculation format, but not in this case, I missed a few items, especially the recording of deferred and current taxes.  

I preferred the textbook’s answering format procedures though, from journalizing transactions to using BASE format or (using “T-accounts” – I added this one) before transferring amounts to the financial statements affected. 

Though the book has it in this order of financial statements presentation: Balance Sheet, Statement of Retained Earnings, and Income Statement last, but if I have to do this in the real CPA exam, I will try to start calculating amounts for the journal entries, using BASE or T accounts, then transferring the final amounts to Income Statements first, then Statement of Retained Earnings and Balance Statement last.

As for other TBS theory problems, they are alright, especially if you have at least done the reading material from the textbook, done the MC questions and number crunching TBS problems.

Until next post.
Earla Riopel, BSCom (USA), DipAcc (UBC)

Tuesday, December 4, 2012

Basic Accounting Theory, Framework & Concepts – FAR Review

Wiley CPA Examination Review, Problems and Solutions 
After my so-called warm-up US CPA examination last month, decided to start my first review session today for my next Financial Accounting Reporting (FAR) section. This time paying a little more attention on details with my FAR notes and doing all multiple choices (MC) questions and Task-Based Simulations (TBS) problems. Some of you might be wondering why I am writing a blog while doing my CPA exam review. 

First of all, with the use of accounting related applications, the need of manual number crunching has been secondary for some accountants. Unfortunately, for all would-be accountants and to be able to pass the FAR examination section, a candidate has to be prepared to answer 60% to 70% number crunching type of questions both in MC and TBS in a very tight timed examination.  

The reason why I passed my REG (November 2009) and Auditing (August 2008) is because they are mostly theory type of questions.  Since I like to write, I use this blog to summarize what I studied every day, serves as my motivation and stay disciplined to study at least a module or a topic each day, and yes, do a lot of number crunching questions. You are welcome to read it if you are interested, do not blame me if you fall asleep!  Anyway, the following are the summary of what I have studied for today’s CPA exam review session:

Newer materials
Wiley’s CPAExam Review Module 9, Basic Theory and Financial Reporting: A. Basic Concepts has added newer topics. These topics in regard to the FASB’s Accounting Standards Codification (ASC) as the sole source for US GAAP (effective July 1, 2009) and the CPA exam testing of the International Foreign Reporting Standards (IFRS) started last year of January 1, 2011.  Also, the International Accounting Standards Board (2001) being responsible for IFRS and its IFRS Interpretations Committee (IFRIC) for issuing interpretations and standards.

In addition, the hierarchy of accounting qualities have a few changes. The previous fundamentals quantitative characteristics such as relevance and reliability have been changed into relevance and faithful representation. Relevance includes predictive value (pv) and confirmatory value (cv); and faithful representation includes completeness (c), neutral (n), and free from error (ffe). As for enhancing qualitative characteristics, include comparability (consistency), verifiability, timeliness and understandability.

US GAAP, IFRS and IASB Framework
There have been some major differences between US GAAP and IFRS.  The following are just a summary:

  (1)  Presentation of Financial Statements (e.g. comparative information, comprehensive    
         income, extraordinary items

  (2)  Revenue recognition on construction contracts (e.g. Percentage-of-completion method vs. 
         Completed-contract method)

  (3) Requirement on subsidiary consolidation of financial statements and for non-controlling 
        interest measurement (as to fair value)

  (4) Inventories on acceptance of LIFO, valuation at LCM or NRV, and impairment loss 
        recognition (as to reversal)

  (5) Current items, such as refinancing of short-term notes classification, and contingencies 

   (6) Accounting of investment properties, revaluation of fixed assets, and accounting of 
          impairment losses (as to reversal)

   (7) Treatment of financial investment as to separations of debt and equity; available-for-sale 
          treatment of impairment loss (as to reversal) and treatment of loans and receivable (as to 
          fair value)

   (8) Likelihood of capitalizing of operating lease (if certain criteria are met)

   (9) Valuation and recognition of deferred tax assets.

First-time adoption of IFRS is generally considered at the beginning of the earliest period, or the latest reporting period of company’s first IFRS financial statements. Financial statements items such as assets, liabilities and equity are restated using IFRS accounting principles.

As to IASB Framework, it provides underlying concepts and information just like FASB’s Statement of financial Accounting Concepts (SFAC), but with differences.  FASB’s SFAC differs with the IASB Framework through the treatment of financial statements elements. FASB’s SFAC has ten elements ( assets, liabilities, equity, owners investments, owners distributions, comprehensive income, revenues, expenses, losses and gains, whereas IASB Framework has only five elements (assets, liabilities, equity, income and expenses. Since IASB Framework is not considered as accounting standards, it cannot override International Accounting Standards (IAS) and IFRS accounting treatment.  An up to date list with detailed explanation can be found at IFRS website.

Multiple Choice (MC) and Task-Based Simulations (TBS) 
Things encountered while doing multiple choice (MC) questions, and task-based simulations (TBS), Module 9-A:

a) As to Multiple Choice (MC) questions:

- Getting used to the new fundamentals quantitative characteristics questions

- Remembering expected present value (pv) calculation format using probabilities

Calculation of cash basis vs. accrual method and vice versa with speed and not missing a 
   step while calculating for the answer 

Calculations of realized gross profit on installment sales, accounting of franchises, and cost 
   method could definitely need some help on my speed and calculation accuracy

It is basically just finding the best formula with best time management (i.e. answer a MC question in 1.5 to 2 mins) and made sure to make flash cards for above calculation formulas.

b) As to Task-Based Simulations (TBS) problems:

-       - The theory TBS was fine, except for the number crunching problems, especially the financial statement analysis, I have to spend a little more time, and even re-do them. I mostly used the “journal entry: debit/credit format" for answering. I find this format easier for financial statements worksheet adjustment of balance amounts. The textbook’s supporting calculation format and the explanations are helpful as well, I used it for cross-referencing my answers.

Until next post.
Earla Riopel, BSCom (USA), DipAcc (UBC)