Accelerated-Depreciation method

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Auditor’s Report, Opinion, Certificate >>

Financial Statement Analysis-FIN621

Lesson-22

NOTES TO FINANCIAL STATEMENTS

(Continued)

Depreciation expenses for year would be: =cost-(estimated) Residual value = 17,000-2000 = 3000

*(Estimated years of useful life-5)

ii)

Accelerated-Depreciation method: In this method higher depreciation rate is charged

in early years and lower rate in later years. Since new plants are most efficient in early

years, matching principle demands that higher depreciation may be charged in earlier

years.

Depreciation = Book Value x Accelerated Dep. Rate

Example: Taking the above case of plant asset acquired for Rs.17, 000

Year

Depreciation

Accumulated

Book Value

Depreciation

17,000 X 40%

6800

10200

10,200 X 40%

4080

10880

6120

6,120 X 40%

2448

13328

3672

3,672 X 40%

1469

14797

2203

2,203 X 40%

881

15000

2000

(reduced to 203)

Note that sine total depreciation in five years is Rs.15, 000 (Rs.17, 000 2,000), the depreciation for the

last year is reduced from 881 to 203 to bring the total depreciation amount in 5 years to Rs.17, 000.

Principles of disclosure and Consistency of Accounting Methods. This is the basic

concept underlying reliable financial statements, i.e. consistently following the Inventory valuation/

pricing and Depreciation calculation Methods. Disclosure of the Accounting methods used, in Balance

Sheet or in the Notes is also an essential requirement of Disclosure Principle. If however, Accounting

Method (s) are changed disclosure must be made of reasons for such change, and of the effect of change

upon the company's net income.

Annual Report Generated By Business

Annual Report is part of Financial Reporting Process which contains Financial

Statements, Notes to financial statements, Auditors' Report, Five-year summary of key financial and

non-financial data, and Management's discussion and analysis of operations (MD&A).

Auditor's Report

Audit of financial statements is independent of the business issuing these. Financial

Statements preparation is Management's responsibility, whereas expressing opinion as to their fairness

is the Auditor's responsibility, Audit Report is issued along with financial statements to persons outside

the business. It provides assurance to outside users about the completeness and reliability (not

necessarily accuracy) of Financial Statements.

Auditor is hired by the company being audited. Usually a Management letter is also

issued by Auditors to Company's management, recommending steps for improving company's internal

control structures.

Financial Statement Analysis-FIN621

Fairness' in the context of Auditor's Report means that financial statements

are not

misleading. Audit is conducted according to Generally Accepted Auditing Standards. During Audit, the

Auditors obtain reasonable assurance that financial statements are free of "material" misstatements.

Audit is conducted by examining, on a test basis, evidence supporting the amounts and disclosures in

the financial statements. It assesses the accounting principles used and significant estimates made by

management. It must also be noted that Audit`s purpose is to determine fairness of financial statements

and not to detect frauds, as such. In the context of materiality, it is to be noted that an item is material if

knowledge of this might reasonably be expected to influence user's decisions. Also to be noted is the

fact an auditor can also make errors like a physician does in diagnosis.

End product of every audit is the auditor's report. An audit involves collection of audit evidence about

the truth and fairness of financial statements or other proposition under review. By careful examination

of the evidence so called the auditor draws appropriate conclusions and forms his opinion. The auditor's

report summarizes results of the work conducted by the auditor and formally communicates the

auditor's opinion.

It is important to note that the auditor's report simply expresses the auditor's opinion on truth and

fairness of financial statements as absolutely correct. An auditor's report is a formal statement that

includes the reporting auditor's opinion formed after careful examination of books of accounts and

related documents. Where as, a certificate is written conformation of absolute accuracy of the facts

stated therein and does not involve any estimate or opinion.

Types of auditor's opinion

An auditor's opinion may be unqualified, qualified or adverse. In certain circumstances the auditor may

disclaim an opinion i.e states his inability to express an opinion.

Unqualified opinion

Opinion of an auditor is termed as unqualified when the auditor concludes that that the financial

statements give a true and fair view in accordance with the identified financial reporting framework.

There is no statuary definition of the words "true and fair". However, true and fair has been taken to

mean the following: (I) free from prejudice or bias, (II) presentation of an objective picture, (III) in

accordance with generally accepted accounting principles, (IV) consistent and having clarity,(V) not

misleading and understandable by the reader of financial statements,. (V) presented fairly, in all

material respects.

Identified financial reporting framework means the set of statutes, rulers, and standards etc. That apply

to the preparation and presentation and presentation of such financial statements.

According to the companies ordinance 1984, in an unqualified audit report the auditor is required to

make some statutory affirmations without reservations, as prescribed in section 255(3).

In an unqualified opinion the auditor also impliedly undertakes that any changes in accounting

principles or in the method of their application, and the effects thereof, have been properly determined

and disclosed in the financial statements.

Modified opinion

An auditor may not be able to express an unqualified opinion. When either of the following

circumstances exists and, in the auditor's judgment, the effect of which is or may be material to the

financial statements:-

Financial Statement Analysis-FIN621

(a) There is a limitation on the scope of the auditor's work; or

(b) There is a disagreement with management regarding the acceptability of the accounting policies

selected, the method of their application or the adequacy of financial statement disclosures.

The circumstances described in (a) could lead to a qualified opinion or a disclaimer of opinion. The

circumstances described in (b) could lead to a qualified opinion or an adverse opinion.

(i) Qualified Opinion

Opinion of an auditor is termed as qualified opinion when the auditor concludes that an unqualified

opinion cannot be expressed but that the effect of any disagreement with management, or limitation on

scope is not so material and pervasive as to require and adverse opinion or a disclaimer of opinion. A

qualified opinion is expressed as being `except for' the effects of the matter to which the qualification

relates.

(ii) Disclaimer of opinion

A disclaimer of opinion should be expressed when possible effect of a limitation on scope of audit is so

material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence

an accordingly is unable to express an opinion on the financial statements

(iii) Adverse opinion.

An adverse opinion should be expressed when the effect of a disagreement is so material and pervasive

to the financial statements that the auditor concludes that a qualification of the report is not adequate to

disclose the misleading or incomplete nature of the financial statements.

100

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