Premium Essay

Limitations of Financial Statement

In: Business and Management

Submitted By sharmaedont
Words 265
Pages 2
The financial statements’ limitations include intentionally manipulating the figures; cross-company or cross-time comparison difficulties in times when different accounting methods are used to prepare the statements and where incomplete records of a firm’s economic prospects exist due to a sole focus on financial measures Financial statements are open to human interpretation and error, worse of all, intentional manipulation of figures. There are instances when high profile management officials have been involved in manipulating figures of the financial statements to indicate inflated economic performance. As such, there are calls focusing on the independence and objectivity of auditing firms. Public companies require an audit of the financial statements useful for investment, tax purposes and financing. Independent accountants and auditing firms usually carry out an audit and their report is included in the annual report. The managing official, for example, the CEO is responsible for attesting that the financial statements are not misleading or untrue. They should also make sure that the financial statements expose those officials involved in any malpractice to face the law. Different ways of accounting across companies and across periods pose another limitation of financial statements since it is difficult comparing a company’s finances across time or comparing finances across companies. In addition, different countries have adopted their own accounting principles thus international comparisons of companies has become difficult. Another limit to financial statements is that they majorly focus on financial measures of health. More than the economic characteristics, an organization requires collecting and presenting information about social, environmental and economic benefits and costs to arrive at an accurate...

Similar Documents

Premium Essay

Limitations of Financial Statement

...Financial statements are based on historical costs and as such the impact of price level changes is completely ignored. They are interim reports. The basic nature of financial statements is historic. These statements are neither complete nor exact. They reflect only monetary transactions of a business. The following limitations may be noted: 1. The financial position of a business concern is affected by several factors-economic, social and financial, but financial factors are being recorded in these financial statements. Economic and social factors are left out. Thus the financial position disclosed by these statements is not correct and accurate. 2. The profit revealed by the Profit and Loss Account and the financial position disclosed by the Balance Sheet cannot be exact. They are essentially interim reports. 3. Facts which have not been recorded in the financial books are not depicted in the financial statement. Only quantitative factors are taken into account. But qualitative factors such as reputation and prestige of the business with the public, the efficiency and loyalty of its employees, integrity of management etc. do not appear in the financial statement. 4. The rupee of 1995, as for example, does not mean the same as the rupee of 2010. The existing historical accounting is based on the assumption that the value of monetary unit, say rupee, remains constant and accordingly assets are recorded by the business at the price at which they are required and the......

Words: 425 - Pages: 2

Premium Essay

Basic Financial Statements

...Basic Financial Statements Jane Antonovsky Colorado Technical University Online  Instructor: Dr. Tracie C. Edmond    ACCT614-1301A-02: Applied Managerial Accounting January 14, 2013 Abstract The Board of Directors and executive management team of Sparklin Automotive Company (SAC) need to make informed and accurate decisions regarding the management of the enterprise, therefore it is up to the corporate business financial analyst to provide the financial information essential to that decision-making process. In this memo, we will review the basic financial statements that must be submitted to the Board of Directors and executives, as well as what each statement contains. Furthermore, we will evaluate how the information contained within these statements will be useful for the management as far as helping them in the enterprise management. As in most processes, there is maximum and minimum that can be achieved, therefore we will review specific limitations of the information provided within these statements. In addition, management team must be aware of the possible information limitations, as well as how they can make sure that they receive whole picture of the enterprise. * Some work repurposed from ACC350-1101B-01, Instructor: Johnnie Bannier, 2/17/2011 Basic Financial Statements This memo will address the basic financial statements that must be submitted to the Board of Directors and executives of SAC, as well as what each statement does and contains......

Words: 2596 - Pages: 11

Premium Essay

Audit Opinion Case

...CPAs to audit its 2010 financial statement. Neil, Inc. has never been audited in prior years. Neil, Inc. is a manufacturing company that uses the periodic inventory system and has no controls in its purchasing process. Neil, Inc. is not a public company. Lifeson and Lee conclude the audit of Neil, Inc.’s financial statements and found no material deviations from GAAP and no other scope limitations. The subsequent discussion will be regarding the opinion that Lifeson and Lee should issue based upon the facts of the case. Issues Examined Upon examining the facts and circumstances of the case several issues arose: - First Year Audits - Not a Public Company - Internal Controls Each issue can greatly influence the appropriate opinion that should be issued by Lifeson and Lee. First Year Audits Neil, Inc. has never been audited. This presents a difficult situation for Lifeson and Lee since they are relying on past financial statements to determine the validity of 2010 financials. According to AU section 420.24, “When the independent auditor has not audited the financial statements of a company for the preceding year, he should adopt procedures that are practicable and reasonable in the circumstances to assure himself that the accounting principles employed are consistent between the current and the preceding.” In order for Lifeson and Lee to gain confidence of consistency and accuracy they would have to expand their audit to financial records of the......

Words: 2202 - Pages: 9

Premium Essay

Student

...scope of the audit of the financial statements b. The responsibilities of the auditor c. The responsibilities of management d. A statement that because of the inherent limitations of an audit, together with the inherent limitations of internal control, an unavoidable risk exists that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with GAAS e. Identification of the applicable financial reporting framework for the preparation of the financial statements f. Reference to the expected form and content of any reports to be issued by the auditor and a statement that circumstance may arise in which a report may differ from its expected form and content. (AU-C §210.12) 2. If the auditor concludes that the terms of the preceding engagement need not be revised for the current engagement, the auditor should remind management of the terms of the engagement, and the reminder should be documented. (Ref: par. .A33–.A34).( AU-C §210.13) 3. In order to establish whether the preconditions for an audit are present, the auditor should a. determine whether the financial reporting framework to be applied in the preparation of the financial statements is acceptable and (Ref: par. .A2–.A8) b. obtain the agreement of management that it acknowledges and understands its responsibility (Ref: par. .A9–.A12 and .A17) i. for the preparation and fair presentation of the financial statements in accordance......

Words: 562 - Pages: 3

Premium Essay

Financial Analysis

...Table of Contents Executive Summary Introduction Analysis and evaluation Limitation Conclusion and recommendation References lists Appendices Excusive Summary The aims of this report is to analyze and evaluate the BEACH ENERGY LIMITED, this report will identify the limitation and benefits of the Beach ENERGY LIMITED, In particular, this report will analyze the Ratio of the company, the Horizontal analysis, Vertical analysis and also the trend analysis. Finally, the report will provide conclusions and recommendations. This report was based on the balance sheet, income statement and some professional information from BEACH ENERGY LIMITED. Introduction BEACH ENERGY LIMITED is a long established oil and gas exploration and production organization. The company is based on the Adelaide, South Australia and Beach Energy Limited (ASX: BPT) is a creation of the long-oil and gas exploration and production companies. The company is headquartered in South Australia in Adelaide, through balanced global portfolio of tenements held by the oil and gas reserves and ongoing exploration projects. BEACH ENETGY LIMITED is the major Australian company and was established in 1961. Beach Energy, original beach Petroleum, founded in the early 1960s, registered by the late Dr. Sprigg, a highly regarded Australian oilman, geologist, explorer and environmental experts. With the election of a new board of directors in the 1990s, the company......

Words: 3000 - Pages: 12

Premium Essay

Financial Reporting Process

...Financial Statement Development and Analysis Part A Three (3) of the financial disclosures that would provide evidence as to whether Coca-Cola is achieving its objective are: Coca-Cola’s mission declares the company purpose and standards by which Coca-Cola will operate. Coca-Cola’s roadmap starts with a mission that is lasting. The basic tasks of Coca-Cola are: to refresh the word, to inspire moments of optimism and happiness and to create value and a make a difference. Maximizing shareholders value over time is Coca-Colas’ mission. In order to achieve this mission, Coca-Cola Company has to execute a business strategy driven by four key objectives: maximize its long-term cans flows and create economic value added by improving economic profit, and increase volume, expand the company share of worldwide nonalcoholic ready-to drink beverages sales. The balance sheet is one of the major financial statements. It shows the company financial position at the end of any specified date. It is sometimes consider the snap shot of the company financial position at any point or time. The balance sheet allows anyone to see what the company owns as well as what it owes. When you are looking at the balance sheet it will cover the assets, liabilities and owner’s (Stockholders’) equity. Assets are things that are owned by the company. These are resources that will have future economic value that can be expressed and measured......

Words: 1281 - Pages: 6

Premium Essay

Xyz Co Co

...Objectives, Advantages and Limitations of Auditing in a Globalized Business world There are two main objectives of auditing. The primary objective and the secondary or incidental objective. a. Primary objective – as per Section 227 of the Companies Act 1956, the primary duty (objective) of the auditor is to report to the owners whether the balance sheet gives a true and fair view of the Company’s state of affairs and the profit and loss A/c gives a correct figure of profit of loss for the financial year. b. Secondary objective – it is also called the incidental objective as it is incidental to the satisfaction of the main objective. The incidental objectives of auditing are: i. Detection and prevention of Frauds, and ii. Detection and prevention of Errors. Detection of material frauds and errors as an incidental objective of independent financial auditing flows from the main objective of determining whether or not the financial statements give a true and fair view. As the Statement on auditing Practices issued by the Institute of Chartered Accountants of India states, an auditor should bear in mind the possibility of the existence of frauds or errors in the accounts under audit since they may cause the financial position to be misstated. Fraud refers to intentional misrepresentation of financial information with the intention to deceive. Frauds can take place in the form of manipulation of accounts, misappropriation of cash and misappropriation of goods....

Words: 2733 - Pages: 11

Premium Essay

Financial Analysis

...FINANCIAL STATEMENT ANALYSIS: A TOOL FOR PERFORMANCE EVALUATION A Case Study of Oceanic Bank By IBRAHIM UMAR PGA/09/07766 M.Sc. Assignment Submitted to Dr. M.I. Kida CNA Department of Accountancy University of Maiduguri 2Financial Statement Analysis: A Tool for Performance Evaluation Jan. 2010 3Financial Statement Analysis: A Tool for Performance Evaluation ABSTRACT Financial statements are prepared to meet external reporting obligations and also for decision making purposes. They play a dominant role in setting the framework of managerial decisions. But the information provided in the financial statements is not an end in itself as no meaningful conclusions can be drawn from these statements alone. However, the information provided in the financial statements is of immense use in making decisions through analysis and interpretation of financial statements. There are various methods or techniques that are used in analyzing financial statements, such as comparative statements, schedule of changes in working capital, common size percentages, trend analysis and ratios analysis. This study intends to analyze financial statement of Oceanic bank in Nigeria in order to come up with an in-depth fact finding on its performance and to see if there is any connection between the recent global economic crisis and its overall performance. 4Financial Statement Analysis: A Tool for Performance Evaluation INTRODUCTION 1.1 Background Financial statement......

Words: 5278 - Pages: 22

Premium Essay

Audits

...unbiased in all aspects. 2. Audit report address The report is usually addressed to the company,its stockholders , or the board of directors.In recent years,it has become customary to address the report to the board of directors and stockholders to indicate that the auditor is independent of the company. 3. Introductory paragraph The first paragraph of the report does three things.First,it makes the simple statement that the CA firm has done an audit.Second,it lists the financial statement that were audit.Third,the introductory paragraph states that the statements are responsibility of management and that the auditor’s responsibility of management and that the auditor’s responsibility is to express an opinion on the statements based on an audit. 4. Scope paragraph The scope paragraph is a factual statement about what the auditor did in the audit. 5. Opinion paragraph The final paragraph in the standard standard report states the auditor’s conclusion based on the results of the audit.The opinion paragraph is stated as an opinion rather than as a statement of absolute fact or a guarantee. 6. Name of CA firm and signature of auditor The name identifies the CA firm and the practitioner who performed the audit. 7. Auditor’s address The audit should also contain a specific location,which is ordinarily the town or city where the audit firm is located. How the parts compare with those found in...

Words: 1474 - Pages: 6

Free Essay

Examination of Prospective Financial Information and Review of Financial Statements

...Prospective Financial Information Definition “Prospective financial information” means information about future financial performance, future financial position, future cash flows, and future movements in equity based on assumptions about future events and courses of action. Prospective financial information includes prospective financial statements, the notes to the prospective financial statements, and any narrative relating directly to the prospective financial statements. Philippine Standard on Assurance Engagements (PSAE) 3400 (previously PSA 810), “The Examination of Prospective Financial Information” establishes standards and provides guidance on engagements to examine and report on prospective financial information including examination procedures for best-estimate and hypothetical assumptions. The general guidelines include the following: Acceptance of Engagement Before accepting an engagement to examine prospective financial information, the auditor would consider, amongst other things: * The intended use of the information. * Whether the information will be for general or limited distribution. * The nature of the assumptions, that is, whether they are best-estimate or hypothetical assumptions. * The elements to be included in the information. * The period covered by the information. Nature and Purpose of Prospective Financial Information Prospective financial information can include financial statements or one or more elements of......

Words: 2213 - Pages: 9

Premium Essay

Content

...UNDERSTANDING THE LIMITATIONS OF FINANCIAL RATIOS Joseph Faello, Mississippi State University ABSTRACT The purpose of this paper is to provide financial statement users and accounting academics with some useful insights when working with financial ratios. Initially, the uses and benefits of financial ratios and the limitations of using financial ratios are discussed from the financial statement users’ and accounting academics’ perspectives. Then, practical advice is provided to both financial statement users and accounting academics alike to mitigate the limitations of using financial ratios. Financial statement users and accounting academics will find the issues discussed in this paper useful in their work with financial ratios. Keywords: Financial ratios, Comparability, Homoscedasticity, Outliers INTRODUCTION Financial ratios play an important role in the analysis of financial statements and accounting research. However, the use of financial ratios comes with its hazards. Both accounting academics and financial statements’ users need to understand the problems and limitations in working with financial ratios. The purpose of this paper is to address these issues and to provide guidance on how to mitigate the problems surrounding financial ratios. Both accounting academics and financial statement users will find this study useful in their dealings with financial ratios. The study is organized as follows: 1. 2. 3. 4. Uses and benefits of financial......

Words: 5849 - Pages: 24

Premium Essay

Finance

...Statistical Tools for Financial Research Anna Hemmer University of Phoenix Statistical Tools for Financial Research The financial condition of an organization is identified through data provided in formal records called financial statements. Financial statements provide an accurate account of a company’s financial position and cash flow of the business. Stakeholders used the data to make decisions regarding future purchases, investments, and profitability of the organization. Analyzing financial statements consists of using various methods (statistical tools) including comparative statements, schedule of changes in working capital, common size percentages (analysis), fund analysis, trend analysis, and ratio analysis. The purpose of this paper is to review the financial statements of one domestic, and one global organization from the Financial Times 500. The two companies for review are the McDonald’s and Samsung organizations. The data provided in the financial statements will convert into a ratio analysis. Common size analysis, and accounting analysis limitations are tools for review. The pros and cons of each of these statistical tools will also be discussed. To understand the importance of statistical tools, a review of ratio analysis, common size analysis, and accounting analysis limitation will be the starting point for this paper. Ratio Analysis Ratio analysis is the most powerful tool of financial analysis (Accounting for Management, 2012, para. 1)......

Words: 2386 - Pages: 10

Premium Essay

Oceanview

...2015. Services and Related Report As you have requested, we will audit the financial statements of Oceanview Marine Company, which comprise the balance sheet for December 31, 2015, and the related statements of income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes to the financial statements. These reviews will be conducted in accordance with Generally Accepted Accounting Principles (GAAP) in the United States of America. We will communicate to you any matters that we believe may require material modifications to make it conform with GAAP. Our audit will be conducted with the objective of our expressing an opinion on the financial statements. We will issue a written report upon completion of our audit of Oceanview Marine Company’s financial statements. Our report will be addressed to the board of directors of Oceanview Marine Company. We cannot provide assurance than an unqualified opinion will be expressed. Circumstances may arise in which it is necessary for us to modify our opinion, add an emphasis-of-matter or other-matter paragraph. We may reserve the right to decline is issue a report due to any reason caused by your party. Should such situation arise, we will notify you in writings. Our Resposibilities and Limitations An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend...

Words: 869 - Pages: 4

Premium Essay

Auditing Ch2

...Chapter 2 Financial Statement Audits and Auditors' Responsibilities |Learning Check | 2.1 The ultimate objective of accounting is the communication of relevant and reliable financial data that will be useful for decision making. Accounting methods involve identifying the events and transactions that affect the entity. Once identified, these items are measured, recorded, classified, and summarized in the accounting records and reported in accordance with generally accepted accounting principles (GAAP). The accounting process is carried out by an entity's employees, and ultimate responsibility for the financial statements lies with the entity's management. The primary objective of an audit is to add credibility to management's financial statements. The typical audit performed in accordance with generally accepted auditing standards (GAAS) involves obtaining and evaluating evidence concerning management's financial statements. Auditing culminates in the issuance of an audit report that contains the auditor's opinion on whether the financial statements do in fact present fairly the entity's financial position, results of operations, and cash flows in conformity with GAAP. The auditor is responsible for forming and expressing an opinion on the entity’s financial statements. 2.2 Verifiability is primarily concerned with the availability of evidence. In an audit the auditor needs to obtain evidence to support conclusions about the fair......

Words: 3005 - Pages: 13

Premium Essay

Cpa Exam Multiple-Choice Questions

...CPA Exam Multiple-Choice Questions on Auditors’ and Accountants’ Reports 1. (N95,62) Which of the following statements is a basic element of the auditor’s standard report? a. The disclosures provide reasonable assurance that the financial statements are free of material misstatement. b. The auditor evaluated the overall internal control structure. c. An audit includes assessing significant estimates made by management. d. The financial statements are consistent with those of the prior period. 2. (N95,68) The fourth standard of reporting requires the auditor’s report to contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard is to prevent a. An auditor from expressing different opinions on each of the basic financial statements. b. Restrictions on the scope of the audit, whether imposed by the client or by the inability to obtain evidence. c. Misinterpretations regarding the degree of responsibility the auditor is assuming. d. An auditor from reporting on one basic financial statement and not the others. 3. (N95,78) March, CPA, is engaged by Monday Corp., a client, to audit the financial statements of Wall Corp., a company that is not March’s client. Monday expects to present Wall’s audited financial statements with March’s auditor’s report to 1st Federal Bank to obtain financing in Monday’s attempt to purchase Wall. In......

Words: 9285 - Pages: 38