THE NEW AUDITOR'S REPORT – THE REVISED ISA 700

Over the years, there have been concerns about the auditor’s report being pedestrian and not revealing much about the audit of an entity. The auditor’s report is more or less a ‘copy and paste’ report lacking any useful information to the users except for the opinion paragraph. Even the opinion paragraph is predictable these days. Hardly will you see a qualified opinion anywhere again, which makes you wonder what then happened to the big corporations that collapsed. With the emerging complexities and recent failures in the corporate world, users of financial statements are demanding more transparency and insight into the audit process. 

In a bid to address these issues, and to enhance the informative value of an auditor’s report, the International Auditing & Assurance Standard Board (IAASB) has developed new and revised

ENSHRINING AN EFFECTIVE INTERNAL CONTROL SYSTEM – THE COSO FRAMEWORK (PART 2) 

To design and implement an effective internal control system, the Committee of Sponsoring Organisation of the Treadway Commission (COSO) identified five components which must be present and functioning. The five components support the organisation in its efforts to achieve its objectives – operations, compliance, and reporting. The five components are Control Environment, Risk Assessment, Control Activities, Information and Communication, and Monitoring Activities. They are relevant at all levels of an entity; entity level, divisions, operating units and functions. In the Part 1 of this series, we have learnt the definition and meaning of internal control and its objectives according to the COSO framework. In this second part, we will take a full dive into the components of internal control and the other changes in the new internal control framework of 2013.

ENSHRINING AN EFFECTIVE INTERNAL CONTROL SYSTEM 

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A corporation, big or small, would be a den of chaos, if a sound internal control system is not enshrined in the entity. A major reality of the modern day complexities of a 21st century business entity is that there are so many transactions, activities, employees, and functions that if they are not properly coordinated and monitored, the business entity would be losing more than it is gaining. A sound internal control system serves to ensure order in an entity so that business objectives are achieved while employing the right personnel and operations are managed in accordance with company policies. Management is concerned with strategic decisions, but, even a well-thought out strategy will fail, if operations are going awry. Management want assurances that the right personnel have been employed; that operations are being carried out orderly in line with company policies; that fraud has been eliminated or can be detected; that the entity is complying with regulations and laws; that authorisation is sought before any transaction; that fraud risk is mitigated or eliminated. These assurances can only be given if a sound internal control system is enshrined in an entity.

PRIOR YEAR ADJUSTMENT – IFRSs GUIDELINE (1)

Financial statements are required to faithfully represent the transactions and events of a company for a reporting period. This means that financial statements should be complete, neutral and free from error. To achieve this, it is emphasized that management should establish sound accounting and internal control systems to ensure the sanctity of financial reporting. But sometimes, accountants could make mistakes in reporting certain transactions. Such errors include mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.  If such errors are detected in the current period, then fine, it can be corrected. But often times, these errors are not detected until another accounting year. The correction of these errors in another accounting year, therefore, would lead to prior year adjustment. Prior year adjustment is therefore a means of correcting past financial statements that were misstated due to errors.

SURVIVING A RECESSION – THINGS TO DO

Today’s piece is not on dividend or any other accounting term. This piece is in response to happenings in Nigeria, and other parts of the world. Well, accountants are social beings too, and we are also affected one way or the other by the happenings. The Central Bank of Nigeria (CBN) recently succumbed to using the word ‘recession’ to describe the Nigeria economy, even though the writing on the wall has suggested so for so long. The drop in the price of crude oil which has starved the country of needed foreign exchange, coupled with the renaissance of militancy in the oil rich Niger Delta region have put the economy in comatose with the Buhari-led government trying so hard to keep things in shape.

Recession is a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters. The second quarter is almost rounding off already, and there are no indications that things are changing rapidly. So, Nigeria is heading to recession, if we are not there already. What can we do in these trying times? I have taken some time to do some soul searching and research, and I have come up with the following points:

ACCOUNTING TREATMENT FOR DIVIDEND (2)

This week has been an exciting week so far. My last post on accounting treatment for dividend has generated a lot of readership, and comments, and also a lot of arguments with a junior colleague. I had a very good debate with my junior colleague on accounting for dividend. He argued that dividend should be reported in the statement of comprehensive income as an expense. I appreciate him for bringing out the debate. In a way, it enabled him to learn, and I also did further research to cement my points.

ACCOUNTING TREATMENT FOR DIVIDEND

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This piece is inspired from my recent audit experience at a client office. The accountant of the client made two basic errors in accounting for dividend. So, let’s start with the errors. Say the company’s name is XYZ Ltd, and the financial year end I went to audit is 31 December 2015 (so the final audit happened say in April 2016). The two errors are:

1. During the year 2015, the company declared dividend for the financial year 2014. The accountant reasoned that since the dividend declared was for 2014 year results, it should be reported as 2014 transactions. So, he treated the dividend as a prior year adjustment for 2014 (since 2014 accounts have been finalised). 

2. The second error was that during the year 2016 (before our final audit), the company declared dividend for 2015 year results. The accountant, following the rationale explained in error 1 above, reported the dividend as an expense in the financial records for 2015.

Now, before going into the solutions for error 1 and 2 above, let us discuss the basics of what dividend is.

ACCOUNTING FOR RESTORATION COST…

As an auditor or a company accountant, one needs to take note of the agreement of any leased property/building. If the terms of the lease require the company to restore the building to its former state, then, restoration cost needs to be factored into the cost of the property/building. The same still applies even if the building is not leased. If constructed or bought and it is required, legally or constructively, to restore the site to its former state, then restoration/decommissioning cost should be accounted for.

Recognition and Measurement

Only when there is a legal or constructive obligation to restore a building/property/site is restoration cost recognized. The amount to be recognized would be a best estimate of what could be incurred. Since this involve an estimate, considerable judgement is required here. However, the estimate should be reasonable.

IMPORTANCE OF HAVING A PROFESSIONAL ACCOUNTANT

Starting a business is no small task, and to keep the business afloat is even harder. For this reason, you would expect that entrepreneurs will make getting a professional accountant paramount, but alas, that is not always the case. My years of experience have shown that a lot of entrepreneurs do not consider having a professional accountant handle their books and financials until the business runs into a ditch. Just as a midwife is very important to a pregnant woman, so also is a professional accountant very key to an entrepreneur who is to birth a business, and even more important is the need for such a professional accountant throughout the years of the company, except you intend to run the business for just a year or so.