What is IFRS?

IFRS is short for International Financial Reporting Standards. IFRS is the international accounting framework within which to properly organize and report financial information. It is derived from the pronouncements of the London-based International Accounting Standards Board (IASB). It is currently the required accounting framework in more than 120 countries.

It requires businesses to report their financial results and financial position using the same rules; this means that, barring any fraudulent manipulation, there is considerable uniformity in the financial reporting of all businesses using IFRS, which makes it easier to compare and contrast their financial results.

IFRS is used primarily by businesses reporting their financial results anywhere in the world except the United States. Generally Accepted Accounting Principles, or GAAP, is the accounting framework used in the United States. GAAP is much more rules-based than IFRS. IFRS focuses more on general principles than GAAP, which makes the IFRS body of work much smaller, cleaner, and easier to understand than GAAP.

 IFRS covers a broad array of topics, including:

ü  Presentation of financial statements

ü  Revenue recognition

ü  Employee benefits

ü  Borrowing costs

ü  Income taxes

ü  Investment in associates

ü  Inventories

ü  Fixed assets

ü  Intangible assets

ü  Leases

ü  Retirement benefit plans

ü  Business combinations

ü  Foreign exchange rates

ü  Operating segments

ü  Subsequent events

ü  Industry-specific accounting, such as mineral resources and agriculture

There are several working groups that are gradually reducing the differences between the GAAP and IFRS accounting frameworks, so eventually there should be minor differences in the reported results of a business if it switches between the two frameworks. There is a stated intent to eventually merge GAAP into IFRS, but this has not yet occurred.

There will be a reduced cost for companies once the two accounting frameworks are more closely aligned, since they will not have to pay to have their financial statements restated to show results under the other framework in cases where they need to report their results in locations where the other framework is required.

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What is GAAP?

What is GAAP?

GAAP is short for Generally Accepted Accounting Principles. GAAP is a cluster of accounting standards and common industry usage that have been developed over many years. It is used by organizations to:

ü  Properly organize their financial information into accounting records;
ü  Summarize the accounting records into financial statements; and
ü  Disclose certain supporting information.

One of the reasons for using GAAP is so that anyone reading the financial statements of multiple companies has a reasonable basis for comparison, since all companies using GAAP have created their financial statements using the same set of rules. GAAP covers a broad array of topics, including:

ü  Financial statement presentation

ü  Assets

ü  Liabilities

ü  Equity

ü  Revenue

ü  Expenses

ü  Business combinations

ü  Derivatives and hedging

ü  Fair value

ü  Foreign currency

ü  Leases

ü  Nonmonetary transactions

ü  Subsequent events

Industry-specific accounting, such as airlines, extractive activities, and health care

The industry-specific accounting that is allowed or required under GAAP may vary substantially from the more generic standards for certain accounting transactions.

GAAP is derived from the pronouncements of a series of government-sponsored accounting entities, of which the Financial Accounting Standards Board (FASB) is the latest. The Securities and Exchange Commission also issues accounting pronouncements through its Accounting Staff Bulletins and other announcements that are applicable only to publicly-held companies, and which are considered to be part of GAAP. GAAP is codified into the Accounting Standards Codification (ASC), which is available online and (more legibly) in printed form.

GAAP is used primarily by businesses reporting their financial results in the United States. International Financial Reporting Standards, or IFRS, is the accounting framework used in most other countries. GAAP is much more rules-based than IFRS. IFRS focuses more on general principles than GAAP, which makes the IFRS body of work much smaller, cleaner, and easier to understand than GAAP. Since IFRS is still being constructed, GAAP is considered to be the more comprehensive accounting framework.

There are several working groups that are gradually reducing the differences between the GAAP and IFRS accounting frameworks, so eventually there should be minor differences in the reported results of a business if it switches between the two frameworks. There is a stated intent to eventually merge GAAP into IFRS, but this has not yet occurred. Given recent differences of opinion arising during several joint projects, it is possible that the frameworks will never be merged.

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Audit of Accounts receivables

Audit of Accounts receivables

If your company is subject to an annual audit, the auditors will review its accounts receivable in some detail. Accounts receivable is frequently the largest asset that a company has, so auditors tend to spend a considerable amount of time gaining assurance that the amount of the stated asset is reasonable.

Objective of the Audit of Accounts Receivable

The overall objective of the audit of accounts receivable and sales is to determine if they are fairly presented in the context of the financial statements as a whole.The sales account is closely tied to accounts receivable; therefore, evidence supporting accounts receivable tends to support sales.

Here are some of the accounts receivable audit procedures that they may follow:

a)  Trace receivable report to general ledger. The auditors will ask for a period-end accounts receivable aging report, from which they trace the grand total to the amount in the accounts receivable account in the general ledger. (If these totals do not match, you may have a journal entry somewhere in the general ledger account that should not be there)

b)  Calculate the receivable report total. The auditors will add up the invoices on the accounts receivable aging report to verify that the total they traced to the general ledger is correct.

c)  Investigate reconciling items. If you have journal entries in the accounts receivable account in the general ledger, the auditors will likely want to review the justification for the larger amounts. This means that these journal entries should be fully documented.

d) Test invoices listed in receivable report. The auditors will select some invoices from the accounts receivable aging report and compare them to supporting documentation to see if they were billed in the correct amounts, to the correct customers, and on the correct dates.

e) Match invoices to shipping log. The auditors will match invoice dates to the shipment dates for those items in the shipping log, to see if sales are being recorded in the correct accounting period. This can include an examination of invoices issued after the period being audited, to see if they should have been included in a prior period.

f) Confirm accounts receivable. A major auditor activity is to contact your customers directly and ask them to confirm the amounts of unpaid accounts receivable as of the end of the reporting period they are auditing. This is primarily for larger account balances, but may include a few random customers having smaller outstanding invoices.

g)   Review cash receipts. If the auditors are unable to confirm accounts receivable, their backup auditing technique is to verify that customers have paid the invoices, for which they will want to review checks copies and trace them through your bank account.

h)   Assess the allowance for doubtful accounts. The auditors will review the process that you follow to derive an allowance for doubtful accounts. This will include a consistency comparison with the method you used in the last year, and a determination of whether the method is appropriate for your business environment.

i)  Assess bad debt write-offs. The auditors will compare the proportion of bad debt expense to sales for this year in comparison to prior years, to see if the current expense appears reasonable.

j)   Review credit memos. The auditors will review a selection of the credit memos issued during the audit period to see if they were properly authorized, whether they were issued in the correct period, and whether the circumstances of their issuance may indicate other problems. They may also review credit memos issued after the period being audited, to see if they relate to transactions from within the audit period.

k)  Assess bill and hold sales. If you have situations where you are billing customers for sales despite still retaining the goods on-site (known as "bill and hold"), the auditors will examine your supporting documentation to determine whether a sale has actually taken place.

l)   Review receiving log. The auditors will review the receiving log to see if it records an inordinately large amount of customer returns after the audit period, which would suggest that the company may have shipped more goods near the end of the audit period than customers had authorized.

m) Related party receivables. If there are any related party receivables, the auditors may review them for collect-ability, as well as whether they should instead be recorded as wages or dividends, and whether they were properly authorized.

n)  Trend analysis. The auditors may review a trend line of sales and accounts receivable, or a comparison of the two over time, to see if there are any unusual trends. Another possible comparison is of receivables to current assets. They may also measure the average collection period. If so, expect them to make inquiries about the reasons for changes in the trends.

The preceding list of audit procedures is designed to detect a variety of audit risks, which include the following:

1. That receivables do not exist
2. That recorded receivable balances are inaccurate
3. That it may not be possible to collect accounts receivable
4. That the derivation of the allowance for doubtful accounts may not properly reflect bad debt experience
5. That sales transactions were not processed in the correct periods
6. That revenue was incorrectly recognized

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Audit Procedure

Verification and Valuation of Liabilities and Guidelines for auditors

Verification of liabilities is equally important as that of verification of assets. The Balance Sheet will reveal the true and fair view of the state of affairs of the business concerns only when the liabilities as well as assets are properly valued and verified.

Verification of liabilities aims at ascertaining whether all the liabilities of the business are properly disclosed, valued, classified, and shown in the Balance Sheet. The auditor should see that they are correctly stated in the Balance Sheet. He should obtain a certificate from the responsible official as to the correctness of liabilities.

This was held in the case of Westminster Road Construction and Engineering Co. Ltd.

In short, the auditor should have to examine and see that,

1. All the liabilities have been clearly stated in the liability side of the Balance Sheet.
2. They are all relate to the business itself.
3. They are all correct and authorized by the responsible official.
4. They are shown in the Balance Sheet at their actual figures.

We shall now discuss the verification and valuation of various liabilities.

Verification and Valuation of Trade Creditors

1. The correctness of liabilities depends upon the correctness of purchases. Hence, the auditor should compare the percentage of gross profits to purchase with that of the previous years to verify the correctness of purchases.
2. The auditor should obtain a Schedule of creditors and verify them with the balances of ledger accounts and statements of account received from creditors.
3. He should check the Purchases Book and Purchases Returns Book with the help of invoices, credit notes, etc. He should also check the postings into the Ledger.
4. He should examine the Goods Inward Book to ensure that the goods purchased have been actually received.
5. He should see that all the purchases made during the year have been accounted for especially at the end of the year.
6. He should examine the discount allowed to creditors during the period and see that these substantiate the credit balances.
7. In case of hire purchases, the auditor should see that the conditions of Hire Purchase Agreement are properly complied with.
8. He should examine the entries made at the beginning as well as at the end of year to check the employees have passed any fictitious entries in this regard.
9. If any debt is found unpaid for a long time, an inquiry should be made since it is possible that instead of paying to the creditor, the amount might have been misappropriated.

Verification and Valuation of Bills Payable
In case of bills payable, the auditor should follow the following verification procedure:

1. The auditor should obtain a Schedule of bills payable and its totals should be compared with the Bills Payable Book and Bills Payable Account.
2. The bills paid after the Balance Sheet date should be examined with the entries passed in the Cashbook.
3. The auditor should obtain confirmatory statements from the drawers directly with the permission of his client.
4. He should pay special attention to the bills that have been paid between the date of the Balance Sheet and the date of his audit have been duly written in the books.

Verification and Valuation of Loans

1. The auditor should verify the existence of loans, if any. In case of a company he should examine the correspondence, contracts, and Directors’ Minute Book.
2. The auditor should ascertain the terms of loan, amount of loan, period and nature of loan, etc. by referring to the loan agreement.
3. He should confirm the balances of the unpaid loans directly from the creditors of the company with the permission of his client.
4. In case of loans or overdrafts taken from a bank, an agreement with the bank and a certificate to that effect should be obtained and examined.
5. The auditor should see whether the interest due has been paid or not. If the interest is due but not paid till the date of the Balance Sheet, he should see whether the same has been clearly shown as liability therein.
6. In case of a Joint Stock Company, the auditor should examine the borrowing powers of the company. He should also examine the Register of Charges, and should see that a charge created has been registered with the Registrar.
7. It should be seen that the interest on loans has been paid up to date. If not he should see whether the amount due is recorded as unpaid in the books of accounts.

Verification and Valuation of Outstanding Liabilities for Expenses

1.       In case of outstanding liabilities, the auditor should obtain a certificate from a responsible officer of the company stating that all expenses become payable have been brought into account.

2.     He should see whether necessary provision for all the outstanding expenses have been made by checking receipts and other vouchers.

3.         He should compare the expenses shown as unpaid during the current year with those of the last year and if he finds any difference, the same should be enquired into.

Verification and Valuation of Capital
Capital is not the liability of an entity but still the auditor is required to verify it in order to report the genuineness and correctness of the Balance Sheet. In case of a firm, the auditor should verify capital with the help of Partnership Deed, Cashbook and the Passbook. He should see that it has been properly recorded in the books of account. In the case of a company, verification of capital can be discussed under the two heads:

First Audit
In case of first audit, the auditor should examine the Memorandum of Association to see what is the maximum capital, which the company is authorized to raise. He should also check the Articles of Association.

The Cashbook, Passbook, and Minute book of the Board of directors should be examined by the auditor in order to find the amount of shares and different classes issued, the amount collected on each shares, and the balance due from the shareholders in respect of calls, etc.

The shares allotted to vendors, should be examined with the contract between the vendors and the company.

Subsequent Audit
Normally, in case of subsequent years, the share capital would be the same as in the previous year unless the company has made any alteration or addition by fresh issue or otherwise. If he come across any change, he should see that the relevant provisions of Secs. 94, 95 and 100 to 105 of the Companies Act have been duly complied with.

Verification and Valuation of Reserves and Fund
Reserves and funds are appropriations out of profits. The directors of a company determine the amount of reserves and funds to be created taking into account the circumstances of the business. The reserve and funds are to be shown on the liability side of the Balance Sheet with footnotes.

Verification and Valuation of Debentures

1. In case of debentures, the auditor should verify the Memorandum of Association and the Articles of Association of the company and ascertain the power of the company to issue debentures. He should find out what is the borrowing limit and ensure that the company has not exceeded the same.
2. He should verify the Debenture Trust Deed to verify the amount of debentures issued and securities offered. If necessary, he can obtain a certificate from the debenture holders to verify the amount of debentures issued.
3. He should enquire as to what arrangement has been made for the redemption of debentures. In case debenture redemption fund has been created, he should verify the Articles of Association.
4. If the debentures are issued at premium or at discount, the auditor should see that the debenture premium and discount on issue of debenture are properly dealt with in the books of account.
5. He should verify Register of Charges and Register of Debenture Holders to see that the debentures shown in the Balance Sheet agree with the debentures recorded in the books of account.

Verification and Valuation of Income Received in Advance
Sometimes the firm receives some amount in advance, which is to be actually received in the next year. It is treated as a liability and should be shown in the liability side of the Balance Sheet. The auditor should verify whether the items of incomes received in advance are recorded in books. The auditor should obtain a Certified Schedule of income received in advance and verify the same. He should ensure that income received in advance is fully shown in the liability side of the Balance Sheet.

Verification and Valuation of Employees Deposits
In commercial and industrial establishments, it is usual to require the employees. who deal with cash or stores to give security deposit. It acts as a safeguard against some possible misappropriation or pilferage on the part of such employees. Sometimes, the employees instead of paying cash as security deposit endorse trustee securities in favor of the employers. In such cases, the auditor should see whether such a security in cash or in securities deposited separately in the bank. He should see whether they are shown distinctly in the liabilities side of the Balance Sheet. He should verify the amount of deposits by reference to the Certified Schedule received from the client.
Verification and Valuation of Taxation Liability
Now-a-days, taxation has become an important liability and so the companies are required to make full provision in the accounts in this regard. The auditor should see whether the provision made therefor is sufficient to meet the estimated liability. Usually, auditors are required to advise on the adequacy of the liability and in such a case, they work as tax consultant.

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