1 IFRA Introduction

UoT BAAF
INTERNATIONAL FINANCIAL
REPORTING & AUDIT
PURPOSE & OBJECTIVE

FINANCIAL REPORTING
 OBJECTIVE:
 “Put simply, the objective of
Financial Statements is to
provide information to those for
whom they are prepared’
(International Accounting
Standards Board)
 Who are the users?
 What information do they require?

FINANCIAL STATEMENTS-
USERS
 Those having reasonable
right to information
concerning the reporting
entity
USERS OF FINANCIAL
STATEMENTS / REPORTS
 Equity investors
 Loan creditors
 Employees
 Analyst-Adviser
 Business Contacts
 Government
 General Public
EQUITY INVESTORS
 Existing and potential

shareholders
 Decisions to buy, sell or hold
shares
 The effect of expectations
 Historic, current and future
earnings
LOAN CREDITORS
 Long term, medium, short term

lenders
 Will they get their money back?
 Current and future cash
positions
 Realizable value of assets
 Economic stability and
vulnerability of the borrower
EMPLOYEES
 Existing, potential and past employees
 Fair and open collective bargaining
 Present and future job security and
progression
 Information requirements:
 Local level
 Simple, non-technical, some non-financial
ANALYST-ADVISER
 Experts who provide information
or advise other groups
 Stockbrokers and analysts
 Trade union advisers
 Government statisticians
BUSINESS CONTACTS
 Suppliers and Trade Creditors:
 Short and long term prospects-especially
liquidity – may be via agencies e.g Dun &
Bradstreet (credit rating agency & major user of
financial reports)
 Customers:
 Ability to sustain long term relationships and
contracts
 Ability to act in a way consistent with the
customer’s ethical and environmental standards
 Competitors:
 Right to keep information on competitive
advantage
GOVERNMENT
 Taxation-verification purposes
 Economic decisions
 Government as a purchaser
or creditor
GENERAL PUBLIC
 Employment
 Environment;
 Energy usage
 Sustainability
 Pollution
 Ethical supplier
 Health & Safety
WHY WE NEED IAS?
 Helps with international trade
 Reassures overseas customers on
credit status
 Helps international borrowing
 Saves time and effort in meeting
local accounting rules
 Meets listing requirements of major
stock exchange
 Having different accounting
systems for different companies
can cause confusion
AGAINST GLOBAL
STANDARDS
 Many companies do not operate
outside their own country
 Borrowing and invesment takes
place within the country
 National standards can take
account of national characteristics
 Cost of complying with international
standards that may not be
necessary
CHARACTERISTICS OF
USEFUL INFORMATION
 Understandable-readily understood by
target users
 Relevant-Appropriate for the target users
 Objective-Free of bias
 Comparable-Consistently prepared
 Timely-In time to enable decision
making
 Reliable-Consistent high level of
accuracy
 Complete-Covers all required areas
Auditing-origins
 Developed as a means of investors
reassuring themselves as to the
management of their wealth by
agents-investors normally distanced
from business
 Auditor often a shareholder-obvious
conflicts of interest
 Evolved to auditor being an
independent professional with the
necessary competences to express
and opinion on the accounts
Auditing-origins
 So auditing is standard across

the world?
 NO
 For similar reasons to Reporting
there are significant differences
in approach
Auditing - Objectives
 Anglo Saxon countries (e.g UK,

Australia)-statements represent the
economic position of the company
 US-statements ‘fairly represent’ the
situation of the company
 EC directives – ‘true and fair view’
 Roman Law – eg Germany –
‘accounting rules have been
respected’
Auditing - Obligations
 Independent of client and state?

 Audit and non-audit activities
 Audit engagement period
 Relationship with the state
 Audit vs tax responsibilities
 Licence to audit – who grants it?
Framework for financial
reporting
Why should differences in
accounting arises?
 Culture
 Legal system
 Taxation
 Political
 Accounting education
 Accounting profession
THE IMPORTANCE OF
FINANCIAL REPORTING
Why must financial reporting be
accurate, transparent & meaningful?
 To give investors confidence
 Investors investment is being put to
good use
 Investors are fully and accurately
informed
 To enable capital to move freely to
where it can be used most effectively
Paul Volcker’s Three Pillars
 Accounting standards
 Accounting and auditing
practices and policies
 Legislative and regulatory
framework
Paul Volcker’s First Pillar
 Accounting standard and rules

 Conceptual Frameworks:
 Serves as a guide to the
standard setters to establish the
principles and concepts that
underpin financial accounting
and reporting standards
Paul Volcker’s Second Pillar
 Accounting and auditing

practices and policies
 Regulation and authorities
 Ethical foundations : A new
framework for reliable financial
reporting
Paul Volcker’s Third Pillar
 Legislative and regulatory
framework:
 Setting
 Monitoring
 Enforcing accounting standards
 Overseeing the regulatory
activities of professional
accountancy
Paul Volcker’s Three Pillars-
Key requirements
 Harmonization is the key
 Restoring confidence in the
audit profession
 Government must provide
backbone and resources to
regulators
Developments
 Sarbanes Oxley Act 2002

 IASB/FASB joint Conceptual
Framework
 IFRS new version
 Truly International Accounting
standards
 International harmonization and
Standardization

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UoT BAAF

PURPOSE & OBJECTIVE

 What information do they require?

 Existing and potential

 Long term, medium, short term

 So auditing is standard across

 Anglo Saxon countries (e.g UK,

 Independent of client and state?

 Accounting standard and rules

 Accounting and auditing

 Sarbanes Oxley Act 2002

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