FINANCIAL STATEMENTS (Виды финансовой отчетности)

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Basically, there are two main types of financial statements: the balance sheet and the income statements. Whatever the economic system, the goal of financial statements is to present an accurate picture of an organization’s financial results, because companies are evaluated on the basis of financial reports. They are oriented primarily towards the individuals, banks or external organizations which provide capital for the business enterprise. Those who have funds to invest or loan may decide where to place their resources on the basis of financial accounting information that business enterprises prepare. The usefulness of such information is determined by its relevance for the users and the extent to which users can rely upon this information. Investors want to know if they will receive dividends and when they should buy, hold and sell stocks. Lenders are interested in determining whether interest and principal loans will be paid when due. Suppliers must determine whether they will be paid in time. Financial statements can also provide useful information to governments for making policy decisions, although governments often require special purpose reports as well.

There are certain requirements a financial statement should meet. Information must be free, i.e. the access to it should be granted to all interested parties. Financial statements should disclose all items that are material enough to affect evaluations and decisions both of external users and managers of the reporting enterprise. Information should be prepared in a comparable way so that the performance of different enterprises, or of the same enterprise over time can be examined. It also should be understandable, and all the transactions and events that form the basis of financial statements should be open for different interpretations. Besides, users benefit more from the information that is available at the time it is required.

Financial statements (also called financial accounting reports) directed to the needs of their primary users are prepared annually and may contain different information depending upon the user group (investors, creditors or the government). Income statements, for example, show how much money is received and spent by the company. Balance sheets are drawn up monthly, quarterly, half-yearly, annually. They provide information about company’s assets, liabilities and owner’s equity at the reported period and are prepared on the principle of double-entry system. The current financial position of an enterprise can also be reported by its chief accountant at the annual meeting of shareholders. Any economic system should provide the relative stability of accounting policies that specify the methods by which a reporting enterprise measures, accumulates and summarizes the economic events and data for its records. It means that no change will be made in accounting policies unless it is clearly necessary.

A special concern is transnational financial reporting i.e. reporting financial results across national boundaries to the user groups located in the country other than the one where the company is headquartered. This kind of reporting presents a unique problem both for the corporations and the users, because the general orientation of the country’s financial accounting, the company’s accounting principles, the language in which the report is written, the currency unit used to present financial statements may be different when a company sends financial reports to users in other countries. There exist several ways of solving this problem among which a transnational company chooses the most appropriate. They include the following: 1) sending the same financial statements to the foreign reader as to the domestic users; 2) translating financial statements into the foreign reader’s language (“convenience translation”); 3) translating not only financial statements into the language of the foreign reader, but also expressing the monetary amounts in the reader’s currency (“convenience statements”); 4) revealing selected financial statements items on the basis of the accounting principles of the reader’s country in the footnotes section of the company’s financial statements; 5) preparing “secondary” financial statements on the basis of the foreign user’s accounting principles, in the user’s language, the amounts being denominated in the user’s currency; 6) preparing financial statements according to World Accounting Principles.

Ask your group-mate:

– to name the main types of financial statements;

– to describe the groups of users for which financial information is prepared;

– to list the main requirements to financial reports;

– to explain the difference between income statements and balance sheets;

– to define the problem of international financial reporting;

– to describe the ways of preparing transnational financial statements.

Work in pairs. Ask questions summing up the main subject, key points, and supporting details presented in the text. Gather data to answer the questions. Organize your questions and answers in the form of a conversation.

Summary writing

1. Read the text again and determine the main idea of each paragraph.

2. Underline the key words and collocations.

3. Put the main ideas into your own words. Try to use all the underlined words and collocations.

4. Organize the key points in the form of a plan.

5. Make a summary. Your summary should reflect the key points and the supporting details in a condensed form.

AUDITING (Аудит)

Audit is defined as a procedure of official checking and examination of annual financial statements of a business or government organization, or of a person’s accounts by a qualified person – an auditor. Depending on the type of audit, the involved expert may operate as an independent person, or may as well represent an independent audit committee and work in a group as is the case with an external audit or public auditing. In some large companies, a method of continuous audit is adopted, which is conducted by an internal accounting specialist who is not responsible for preparing financial documentation under audit. The audit may also be classified as financial statements audit, income tax audit, “value for money audits”, environmental audits, financial management audit, etc.

The purpose of an external audit is to make certain that a person, a legal entity, or an organization shows accurately the true financial position in the proper form required by law or regulation of the state, in accordance with acceptable accounting principles, and does not hide any dishonesty. In fact, external audit is intended to provide shareholders, bankers, government agencies, etc. with useful and reliable information about finance managing in the business enterprise under audit. Auditors do not monitor the financial transactions of a business, nor do they have any legal powers. They only offer an opinion in final auditor’s report which gives credibility to the financial statements, or reveal undesirable practices to prevent their recurring in the future. In certain public companies audits help to test the effectiveness of internal control over financial reporting.

Auditing procedures are complicated, manifold and based on national or international auditing standards which differ for audits of public companies, private enterprises, government organizations and entities that receive government funds. For the audit to be performed effectively, the auditor should properly plan the audit and direct efforts to areas most expected to contain risks of material misstatement due to error or fraud. As a rule, these areas include transactions, account balances, presentations and disclosure. An external auditor is assisted by a person within the entity, whom the auditor properly supervises.

First of all, the auditor should obtain an understanding of the enterprise, its environment and internal control system. The next step is to analyze the financial statements of an enterprise prepared by its management, identify and assess the risks of material misstatement. For this purpose the auditor designs audit procedures or uses testing and other means of examining all information that is available to obtain sufficient appropriate audit evidence that misstatements do not exist (or exist). In some cases, the complete information is not provided by the management intentionally or unintentionally, or concealed fraud may be undetectable with auditor procedures, which present inherent limitations of an audit and cause audit risk.

Nowadays the scope of auditors’ skills is much wider, as they not only analyze the firm’s financial statements, but also render a wide range of consultancy services, help their clients to prepare tax returns, give advice on the maintenance of accounting and organization of internal control. In English-speaking countries, public auditors are usually certified, and high standards of professional qualification are encouraged. There are also government auditors addressing the key problems in the field of public accounting sector auditing, budget efficiency problems, performance of expenditure programmes, etc.

Read the text and discuss in group the significance of auditing for evaluating a successful performance of a business enterprise.

Work in pairs. Ask questions summing up the main subject, key points, and supporting details presented in the text. Collect data to answer the questions. Organize your questions and answers in the form of a conversation.