Turning to errors that may, but may not always, be the result of the risk factors discussed above, it should again be stressed that all possible errors and situations are countless. Only the most common ones are listed below. These are:
- • incomplete information, in particular in periodic financial statements,
- • distortion of the financial result by inflating revenues or lowering costs,
- • the introduction of cost balance sheet items into assets,
- • incorrect calculation of accounting estimates,
- • incorrect classification of leasing contracts;
Any of the errors mentioned may be intentional (defraud) and non-target, resulting from failure or insufficient competence. Errors reduce the usefulness and reliability of financial information. The more significant the error, the greater the impact.
In time, the unit ceases to control the height of the shifts and this is when they occurred. The question of "hidden errors" then returns with double force most often after external audit or tax audit.
The incompleteness of information in the periodic financial statements is most common:
- the absence of a description of important, significant but unusual transactions, i.e. acquisition of an entity, a basic error, change in accounting policy, acquisition of shares or shares, changing the nature of the relationship with the associated company to a subsidiary,
- an unsuited accounting policy that takes into account specific situations arising from the nature of the entity or industry, such as specific revenue accounting, accruals or a methodology for clearing stocks of products, goods, raw materials,
- lack of adequate disclosures regarding the continuation of operations; in recent years incompleteness is most often linked to the failure to provide forecasts and plans which respond to the risks that exist in times of crisis,
- the lack of a description of, and management of, the existing risks in virtually every company related to the monitoring of claims (credit policy) and foreign exchange risks,
- insufficiently detailed tables for significant items such as accruals of costs, reserves, current and deferred tax calculations;
The distortion of the financial result is linked to the desire to show better financial condition than it is in fact, in order to obtain personal benefits or benefits for the company itself. This is most often done by shifting costs and revenues between years.
It may happen that the disadvantage for the company manipulating the results due to macro- or micro-economic factors is worsening.
At that time, further, increasing redeployments are made in subsequent years, in order not only to compensate for the current adverse situation for the entity, but also the effect of the previous year's targeted errors which have taken part of the result of the current period.
In time, the unit ceases to control the height of the shifts and this is when they occurred. The question of "hidden errors" then returns with double force most often after external audit or tax audit. This is when the actual costs of such an operation are revealed, not only in connection with the need to correct tax settlements, but also with fines, penalty interest and in extreme situations even the liquidation of the company or the deprivation of liberty of persons responsible for the existence of a proceeding.
The introduction of cost balance sheet items to assets often occurs in real estate or construction companies that conduct large investments. With a large amount of investment in such entities, it is relatively easy to hide the costs of the period associated with the administration and running of the company in the manufacturing costs of fixed assets or stocks, real estate or other buildings and structures.
Accounting estimates are particularly vulnerable to manipulation in a crisis. In addition to the classic situation of underwriting up-to-date write-downs, or provisions for guarantee costs and services performed, but not invoiced, frequent manipulations can be seen in construction and service companies using settlements based on long-term contracts.
Manipulations with estimates in these units are made through incorrect forecasts that affect the estimation of the progress of the contract and the outcome shown on it during the period.
The incorrect classification of leasing, i.e. in practice: classification of financial leasing as operational, is also a common error. The most common motive for its occurrence is the willingness of financial services to facilitate themselves, accounting accounts that are much simpler for operational leasing.
As noted above, there are much more errors and irregularities in the accounts. Above, only the most typical situations are presented. In identifying all, not only the errors mentioned above, and protecting company owners and boards from tax risks associated with their occurrence, a sound auditor may and should help.
The statutory auditor’s primary role is to ensure that the audited accounts are correct in all relevant aspects.
In order to improve its effectiveness in this respect, the management of the company may and should indicate to the auditor the risks occurring in the Company, the facts to which more attention should be paid, or the unusual transactions where there is a certain method of accounting.
It is worth that the management of the company should not only see in the expert review the verifier whose sole purpose is to comply with the statutory obligation to provide a signed audit opinion, but above all the advisor/consultator improving the reliability and accuracy of the information and financial system and internal control system for users not only externally but also within the organization, i.e.: Management Board, Chief Accountant, Financial Director. It must not be forgotten that the quality of the statutory auditor's work and the certainty that he will carry out the required procedures is in the best interests of the individual, and in particular of the accounting officers and the Management Board.
This is especially remembered by individuals who, in practice, would like to say "on their own skin" that it is far more important than a "fast" study, an extremely competitive salary and a lack of problems with the presence of the research team longer than a few days.
The role of the statutory auditor in improving the usefulness and reliability of financial information.
In fact, much has been said above. Here it is worth considering how and at which points of audit of financial statements, it provides the company with its well-executed value added work and allows to reduce the business risk of its business. It is important that the boards of companies should be aware of these moments and in their own well understood interest and of the interest of the entity they are headed can use them skillfully. Let us exchange and present them:
Review and recommendations of the internal control system
During the audit of the financial statements, auditors shall be required to review and evaluate the internal control system. The result of this review and evaluation are recommendations most often submitted after completion of the study in the form of an official letter to the Management Board.
Often, guidance on weaknesses and possibilities for improving internal control systems, as well as on company reporting systems and their ability to improve them, is provided by audit teams during the audit.
Auditors' recommendations in this respect are of particular importance to entities with a large number of repetitive transactions such as supermarket networks, wholesalers, tele-operators, telecommunications companies, banks and insurers.
It is worth remembering that auditors have all the assets to undertake a full verification of the internal control system and to provide comprehensive recommendations on filling in gaps and improving the effectiveness of existing internal controls.
Such an overall analysis should be taken into account in particular by the large industry units mentioned above, in which the risks arising from the malfunctioning internal control system are significant. Among them, special attention should be paid to the bodies responsible for setting up the Audit Committees.
For them, the review of the existing internal control system by the newly appointed Audit Committee would constitute an excellent start to the internal control monitoring process, which is known to include one from the basic statutory tasks of the Audit Committees.
A letter to the board.
As mentioned above, the letter to the Management Board serves the auditor to formally pass on recommendations and suggestions for improvements which he has noticed during the audit of the financial statements.
These recommendations mostly concern the internal control system, but may also refer to: identified tax risks, liquidity management, profitability, as well as to operational issues such as debt flow management, commodity trade or distribution and sales organisation.
Since these recommendations were written by a person outside the organization and from the position of experience resulting from working in many units and on many systems, it is worth to think calmly about the sense of their introduction and not to reject the ideas submitted in advance, only because of their sometimes too critical character.
Participation in annual inventory.
The participation in the annual inventory resulting from the procedures of the standard audit of financial statements is quite limited and mainly consists of observing the inventory procedures carried out by the company and calculating the sample of inventory goods.
Such participation, however, is sufficient in most cases to identify the apparent shortcomings of the appropriate procedures, which may result in a significant risk of material fraud.
However, in specific cases it is always possible to carry out a comprehensive verification of the inventory carried out or even to conduct or carry out a full inventory by the auditor and his team, as part of a separate order.
Audit Opinion on Financial Statements.
It should not be forgotten that the greatest added value resulting from the statutory auditor's work is the opinion itself which confirms in all relevant aspects, inter alia, the correctness of the functioning accounts, the accuracy of the valuation of the balance sheet components and the performance account, as well as the completeness of the accounting of liabilities and provisions, as well as of revenue and costs. While such an opinion is the result of careful examination procedures, it significantly improves the reliability of financial information and thus significantly reduces business risk.
Summary
The article sought to indicate how appropriate use of the auditor could help to improve the usefulness and reliability of financial information. In order for this aid to be fully extended, the perception of the audit profession by the companies must be changed.
This change depends on whether the Management Boards, Supervisory Boards and Company Owners will only expect statutory auditors to fulfil their legal obligation to examine financial information, or to treat them as equivalent partners, advisors to ensure the reliability of financial information, as well as high-end specialists in: organisation of reporting systems, internal control systems and the organisation of the business model itself.
It should be borne in mind that, from the position of their experience in working with many accounting systems, companies of different industries and sizes, auditors have all the advantages to choose the best of the solutions encountered in a given unit in all the above mentioned ranges.