Financial Statements are prepared to show the true and fair view of the state of affairs of the company.Balance Sheet to show the position of assets and liabilities and Statement of profit and loss to show the net result of operations over a period. Relating to Financial Statements, the risk that we would be concerned is of risk of material misstatement. Risk of Material Mistatement may arise due to;
(i) Recording of revenue item as capital or a capital item as a revenue item. By doing so the profits for the period do not reflect at their true value. (ii) Overstating or understating of receivables/payables, on doing this actual payable or receivable might be substantially different from the one really due to or by us. (iii) not following the accrual policies of accounting, leading to which expenses or incomes of one period get recognized in another period affecting the true and fair view. (iv) recording cash transaction as a credit one and showing artificial debtors/creditors hence misappropriating cash(using cash for some other purpose for the remaining credit period). (v) Recording of an expense of personal nature as business expense to reduce business profits so as to lower tax burden. (vi) Creation of bogus workers at the year end and making more payouts and thus increasing expenditure as at the year end. (vii)Booking huge amounts of sale on the year end to show a better GP. Adressing the risk of window dressing
Window Dressing is a technique employed by enterprises to cover up the weak status of operations or present a better looking set of financials that what actually is. Overstating of closing stock is an example of how one can boost Gross Profit. Even Charging of depreciation at lower rates shows higher profits and stonger backing by fixed assets in the balance sheet. The motive behind window dressing might be to
1)show a better picture of the financials especially in the case of listed companies...