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| 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.
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Contact:
Earla Riopel, BSCom (USA), DipAcc (UBC)
