(a) That all of the assets and equities on the balance sheet do exist (b) The au
ID: 3637249 • Letter: #
Question
(a) That all of the assets and equities on the balance sheet do exist(b) The audit controls must be applied per each accounting period within the annual report
(c) For assessing the value of the GAAP controls, problematic cases need be distinguished from normal
(d) that all employees are properly trained to carry out their assigned duties
(e) That all transactions on the income statement actually occurred
(f) that all allocated amounts such as depreciation are calculated on a systematic and rational basis
(g) There is no exception in the above list of assertions, all apply to publishing audited financial statements
Explanation / Answer
a)Negative shareholder equity could show up on a company's balance sheet for a number of reasons, all of which should serve as red flags to look much closer before investing. To understand why, you need to look no further than the formula for shareholder equity: Total Assets - Total Liabilities = Shareholder Equity As a measure, shareholder equity reveals what the owners of a company (stockholders) would be left with if all assets were sold and all debts were paid. In the case of negative shareholder equity, the owners theoretically would owe money, although the structure of publicly traded corporations prevents common stockholders from facing actual liability. Negative shareholder equity most often comes from the accounting methods used to deal with accumulated losses from prior years. These losses generally are viewed as liabilities carried forward until future cancellation. Oftentimes, the losses exist on paper only, which makes it possible for a company to maintain operations, despite the continued posting of substantial losses. Other situations that can contribute to negative shareholder equity are leveraged buyouts (or borrowing), severe depreciation in currency positions and substantial adjustments to intangible property (patents, copyrights, goodwill and the like). b)The preparation and presentation of a company's financial statements are the responsibility of a company's management. The Securities and Exchange Commission, however, requires independent certified public accountants to audit the financial statements of all publicly traded companies. In other words, an accountant who is not an employee of a company and who is a licensed accountant must examine a public company's financial records for accuracy. During an audit, the auditor reviews and evaluates a company's accounting system, records, internal controls, and financial statements in accordance with generally accepted auditing standards. The auditor then expresses an opinion concerning the fairness of the financial statements in conformity with GAAP. Auditors issue unqualified reports or unqualified opinions when they find financial statements fair and accurate after examination. The unqualified report contains three paragraphs: an introductory paragraph, a scope paragraph, and the opinion paragraph. In addition to the unqualified opinion, an auditor may issue a qualified opinion, an adverse opinion, or a disclaimer opinion. If auditors conclude that financial statements are accurate and in accordance with GAAP except for a few items, they issue qualified opinions. Auditors issue adverse opinions when they deem financial statements inaccurate or not in accordance with GAAP. When accountants lack sufficient information to give an unqualified opinion or when they are not independent of the companies they are auditing, they issue disclaimer opinions. An auditor's report typically states that: The auditor is independent. The audit was performed on specified financial statements. The financial statements are the responsibility of the company's management. The opinion of the auditor is the auditor's responsibility. The audit was conducted according to generally accepted auditing standards. The audit was planned and performed to obtain reasonable assurance about whether the financial statements are free of material misstatements. The audit included examination, assessment, and evaluation stages. The audit provided a reasonable basis for an expression of an opinion concerning the fair presentation of the audit. c)For both private companies and public registrants, Fair Value has infiltrated Generally Accepted Accounting Principles (GAAP) to create entirely new levels of complexity. In fact, more than 50 GAAP pronouncements and interpretations now reference Fair Value, presenting significant challenges for internal finance departments. MFA’s Fair Value Specialists have a rare combination of expertise in both Fair Value and GAAP that can be applied to provide immediate relief and a smoother overall process that saves time, money and aggravation. Our professionals pinpoint the appropriate information and integrate it into the financial picture to take a significant burden off of clients’ internal resources. Understanding Fair Value MFA holds the valuation experience necessary to efficiently assess Fair Value, with professionals with the following credentials: Accredited in Business Valuation (ABV), Certified Valuation Analyst (CVA), Accredited Valuation Analyst (AVA) and Accredited Senior Appraiser (ASA). Understanding GAAP From private company stock valuation, ASC 718 and ASC 505 to purchase price allocations and goodwill impairment, GAAP is ingrained in MFA’s services as CPAs, auditors and consultants. Our team has deep expertise with companies across many industries, and we are able to incorporate that background in our work as Fair Value Specialists. We can quickly pinpoint how a company’s measurement of Fair Value impacts GAAP, appreciating that minor swings in valuation can have a material effect on the numbers. e)Sometimes transactions take place in one period but impact another. Other times, you know a transaction will be finalized in the future, but at least some part of it has ties to the current period. These two situations are the main reason for adjusting entries, which are entries that account for transactions that occur in one period but affect another. You have to record these out-of-time entries as you get ready to close one accounting cycle to make sure they have been included in the right period. The two main types of adjusting entries are deferrals and accruals. These are mostly used in accrual basis accounting systems, but some entries can apply to people who use the cash basis as well; depreciation is the most common example. Accrual entries are used to record transactions that haven't actually happened yet, at least on the money side (these will be explained in more detail in the next section). Deferral entries are pretty much the opposite: they record expenses that you paid in advance but haven't incurred until now, or revenues that you've been paid for already but haven't yet earned. Deferral entries are sort of like postponed transactions; the money part has already happened, but the income statement impact was put off until later. Remember those two balance sheet accounts, prepaid expenses and unearned revenues? Here is where these two accounts make a transformation from balance sheet to income statement. Prepaid expenses turn into current expenses, and unearned revenues turn into current revenues. Insurance expense is a perfect example of a prepaid expense. You probably paid your business insurance premium in one lump at the beginning of the year, but that coverage isn't just for the month you sent the check; it's for the whole year. When you paid the bill, you made an entry in the prepaid insurance account. Now you have used up part of that premium, and you have to make an adjusting entry to reflect that. Depreciation is another major form of expense deferral, and it is recorded as part of the adjusting entries. The flip side of prepaid expense is unearned revenue, meaning that a customer has paid you for something you didn't do yet. Any time a customer gives you a down payment, a deposit, an advance, or a retainer, they all hit the same unearned revenue account. When you got that advance money, you recorded a liability on your books; what you owed was goods or services instead of money. Now, when you have completed the work or delivered the product, that revenue has been earned. An adjusting entry is called for to show that.
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