Question

Registered Companies are required to circulate annual reports to members of the company. Some of the most important components are the Auditors Report and the Directors Report.

(i) Briefly explain the type of opinion that may be expressed in the reports and how such opinions affect the organization. (ii) The Directors Report is a key component of the Annual Financial Report of a company. State and explain any four (4) of the contents of the Directors Report. ( iii) You believe that financial statements are meaningful only when key accounting concepts and conventions are followed. Explain any three (3) of such concepts.

Answer 1

(i) In financial reporting, an auditor's opinion is the outcome of an auditor's review of an organization's financial statements.

The auditor's opinion does not judge the financial position of the reporting entity. Nor does it otherwise interpret financial data. Instead, the opinion simply answers two questions:

• Firstly, do the statements conform to Generally Accepted Accounting Principles (GAAP)?
• And, secondly, do they fairly represent the entity's financial accounts?

There are four possible opinions:-

1. Unqualified opinion- It means that financial statements confer to GAAP and represent entity's financial accounts fairly.

2. Qualified Opinion- means the auditor finds that reports conform to GAAP, except in just a few areas. With qualified opinions, auditors state specific reasons for the opinion.

3. Adverse Opinion means the auditor finds one or both of the following:-

a) Statements do not fairly representthe entity's accounts.

b) The audited statements do not comply with GAAP

4. Disclaimer from Opinion- It simply means that auditors chooses not to issue an opinion.

Auditors may issue a disclaimer of opinion when:

• They believe they cannot audit impartially. With the disclaimer, therefore, auditors recuse themselves.
• The auditor's scope is limited. This occurs, for instance, when auditors cannot access certain financial data.
• Auditors have other doubts about the reports.

(ii) Any four (4) of the contents of the Directors Report are as follows:-

a) Directors Reports should provide a review of the company's business and significant changes.

b) The principal activities of the company

c) New matters which will or might significantly affect future operations and therefore financial performance

d) The name of each director and the period for which they were a director, the names of other company officers or partners in the firm which audits the company;

(iii) In drawing up accounting statements, whether they are external "financial accounts" or internally-focused "management accounts", a clear objective has to be that the accounts fairly reflect the true "substance" of the business and the results of its operation. The theory of accounting has, therefore, developed the concept of a "true and fair view". The true and fair view is applied in ensuring and assessing whether accounts do indeed portray accurately the business' activities.To support the application of the "true and fair view", accounting has adopted certain concepts and conventions which help to ensure that accounting information is presented accurately and consistently.

The conventions you will encounter in a set of accounts can be summarised as follows:

a) Monetary measurement- Accountants do not account for items unless they can be quantified in monetary terms. Items that are not accounted for (unless someone is prepared to pay something for them) include things like workforce skill, morale, market leadership, brand recognition, quality of management etc

b) Separate Entity- This convention seeks to ensure that private transactions and matters relating to the owners of a business are segregated from transactions that relate to the business.

c) Materiality-An important convention. As we can see from the application of accounting standards and accounting policies, the preparation of accounts involves a high degree of judgement. Where decisions are required about the appropriateness of a particular accounting judgement, the "materiality" convention suggests that this should only be an issue if the judgement is "significant" or "material" to a user of the accounts. The concept of "materiality" is an important issue for auditors of financial accounts.

Some important accounting concepts underpin the preparation of any set of accounts:

a) Going Concern- Accountants assume, unless there is evidence to the contrary, that a company is not going broke. This has important implications for the valuation of assets and liabilities.

b) Consistency- Transactions and valuation methods are treated the same way from year to year, or period to period. Users of accounts can, therefore, make more meaningful comparisons of financial performance from year to year. Where accounting policies are changed, companies are required to disclose this fact and explain the impact of any change.

c) Prudence- Profits are not recognised until a sale has been completed. In addition, a cautious view is taken for future problems and costs of the business (the are "provided for" in the accounts" as soon as their is a reasonable chance that such costs will be incurred in the future.

d) Matching (or "Accruals")- Income should be properly "matched" with the expenses of a given accounting period.