Question

Question 3:

Comment on the following statements:

1. “The balance sheet is pretty useless for decision making. It only shows the position at a single point in time and a past point in time, at that.”

2. A company’s income statement shows an annual sales revenue of about AED 60 million and interest payable of AED 6.5 million. The auditors discovered that an employee had fraudulently paid himself AED 2,000 and charged this to ‘interest payable’ in the income statement.

Would the auditors be reasonable to conclude that the income statement fails to show a ‘fair representation’ of what happened during the year concerned?

Answer 1

a.“The balance sheet is pretty useless for decision making. It only shows the position at a single point in time and a past point in time, at that.” - This statement is incorrect.

Reason:- Balance sheet is one of the most important statement in decision making because of the same reason metioned above, which is that it shows the position at a single point in time and a past point in time. Networth of the company is one of the main value that investors looks into before investment, networth can be determined only from balance sheet. Earnings per share is another reason why balance sheet is important. Apparently all important factors any investor looks into is available in the balance sheet.

b.

It is the responsibility of the management to prepare financial statement true and fair. An auditors responsibility is to collect sufficient and appropriate audit evidence so that he can express a reasonable opinion on the financial statements of business. For the auditor to express an opinion of a financial statement to "fails to show a fair representation", the misstatement in the statement should be material and pervasive. In this question the AED 2,000 misstatement is neither pervasive nor material. Thus the statement is false.