Conceptual framework, accounting standards, external auditor

Purpose of accounting standards

• protecting external users

  • company fairly represents financial position and performance

  • know information is correct - confident decisions

  • useful to investors, creditors, employees, regulators

  • provides comparable reports

• Assisting directors in discharging their obligations

  • directors are accountable

  • proves businesses have proper practices

• Providing confidence to investors in Australian capital markets

  • provides confidence

  • promotes market efficiency

  • Australian market is trustworthy - from regulations

Conceptual framework

• developed by AASB

• rulebook for accountants to prepare financial reports

  • layout

  • information included

• justify why reports are important

Asset

An asset is a present economic resource controlled by the entity as a result of past events.

Liability

A liability is a present obligation of the entity to transfer an economic resource as a result of past events.

Income

Income is increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims.

Expenses

Expenses are decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims

Equity

Is the residual interest in the assets of the entity after deducting all its liabilities

Recognition Criteria

Relevant information - have to provide relevant (up to date, useful, current information)

Faithful representation - information is correct and complete, true

Reporting entities

• Have to prepare reports as people outside the business need to know how its doing

• Investors, shareholders, banks or lenders, government and the public

• Need information to make decisions

General purpose financial reports

Disclose information relevant to performance, position, financing and investing

 

Statement of cash flow

• Information around cash receipts and cash payments

• Cash only - not profits

 

Statement in changes in equity

• Users can see overall changes in equity during a period

 

Statement of financial position (balance sheet)

• Lists assets, liabilities and equity

• Provides information around liquidity and gearing

 

Statement of comprehensive income (income statement)

• If the business is profitable or not

• Measures performance of the company

• Profit, other comprehensive income

Users of GPFR

• Investors

• Shareholders

• Lenders

• Employees

• Analysts

• Auditors

• Managers

Characteristics of GPFR

Relevance

• information must be disclosed in a timely manner, able to be used to make financial decisions

  Materiality

• if information was omitted, it would influence decisions

Faithful representation

• reports are correct, neutral, complete

Comparability

• compare different years and entities

Verifiability

• same result if other auditors recreate

Timeliness

• information is up to date and published

Understandability

• reports are able to be understood by someone with reasonable knowledge

external auditing

independent examination and report on a half yearly/ annual basis of the GPFR of a public company.

completed with a registered external auditor, obligated to ASIC.

appointed by directors and reappointed at the AGM each financial year

Function of an external auditor

• Protect external users of financial statements - as they aren't inside the company, must rely on accurate GPFR - compliant with Australian Accounting standards

• Gives stakeholders confidence that reporting entities can be relied upon to make financial decisions

• Ensures entity isn't trading insolvent

• No dishonest or misleading conduct

Role of external auditor

• Protects external users by checking accounting procedures and records of company

• Testing individual transactions or regular ones

• Decide if financial statements are true and fair

• Must prepare written report

• Must report to ASIC within 28 days if suspect breaches