By considering users in the development of financial statements, entities are able to reduce the volume of disclosures while creating a high-quality document. Show
7.1 Alignment of monthly and year-end reporting processesMaintaining good financial reporting practices throughout the year enables entities to be responsive to change, and significantly enhances the quality of financial statements. Adopting good financial reporting practices throughout the year is the major factor contributing to most entities being able to complete their financial statements in a timely and efficient manner. Better practice entities view financial management and reporting as a continuous process that encompasses budget allocations through to the preparation of monthly financial statements and annual financial statements. Within-year reporting is integral to making year‑end preparation processes more effective, as financial statements have been systematically prepared and reviewed as an important, albeit routine, part of ‘business as usual’ activities throughout the year. While a full set of notes to the monthly financial statements would not be expected to be prepared, it is important that key reconciliations are performed throughout the year and anomalies are investigated and rectified as they are identified. Where the monthly financial reporting process is aligned with the preparation of the annual financial statements, entities experience less difficulty and delay in completing their year-end processes as:
7.1.1 Financial reporting—from monthly to year-endFinancial management by better practice entities is characterised by the following:
Better practice entities will also streamline and simplify routine end-of-month processes, such as calculating and estimating (where appropriate) accruals, performing reconciliations and processing journal entries and clearing suspense accounts. Within-year financial reporting will also be used to identify and address, to the extent practicable, issues that have the potential to adversely affect the preparation of the annual financial statements. Errors or misstatements are often identified by review and quality assurance processes during the year and at year-end. If they remain uncorrected, errors or misstatements, either individually or collectively, may have a material effect on the financial statements. Errors or misstatements identified during the year should be investigated and analysed to determine their root cause. A misstatement, even if it is immaterial in amount, can indicate a broader issue that warrants investigation. Where an error or correction is expected to be of material impact on the year-end process, this should be discussed with the audit committee and the auditor as appropriate. 7.2 The application of materialityThe materiality concept recognises that the reporting of excessive information may be counterproductive to making and evaluating decisions concerning the allocation of resources and recognises that achieving greater accuracy or greater precision in financial statements will generally demand greater use of resources, higher costs and take more time to prepare. Linked to risk management, setting appropriate materiality thresholds enables entities to undertake risk assessments and establish appropriate risk treatments. While it is expected that an entity’s accounts and records will record all financial transactions and other events as a basis for preparing the entity’s financial statements, the concept of materiality and its application are important considerations. AASB 101 (and AASB 1060 for Tier 2 entities) states that:
7.2.1 Areas where materiality is commonly appliedTwo areas where materiality considerations are commonly applied are:
In both these areas, judgements are routinely made about the effect on the financial statements of not including transactions under a certain threshold, for example:
Such a practice is acceptable as long as it can be demonstrated that, in aggregate, an immaterial amount of PPE falls below the threshold and will clearly not affect the entity’s overall financial position and results. An example of this would be amounts too small to warrant disclosure in normal circumstances that may be considered material if they arise from abnormal or unusual transactions or events. For control purposes, entities will normally maintain a register of portable and attractive assets that could be reviewed periodically to assist in assessing the materiality of assets that are not capitalised. 7.2.2 Practical steps when planning for materialityThe following are practical steps for planning and scheduling the application of materiality:
7.2.3 Materiality thresholds for errors and misstatementsSetting appropriate materiality thresholds for the adjustments of errors or misstatements for year-end processing will minimise the likelihood that the financial statements team will spend disproportionate resources on correcting matters that that are of immaterial impact to the financial statements. Better practice entities will promote an environment in which the correction of errors or misstatements is seen as an appropriate course of action, regardless of whether or not they are considered to be material. Such an approach will also help to remove the difficulties that can arise in relation to the effect on current year financial statements of uncorrected prior year misstatements and minimise unadjusted audit differences. However, there may be instances where adjustments are not considered appropriate, due to reporting timeframes, the practicality of making the change, the risk of error in other aspects of the financial statements process, and the relative materiality of the errors (for example, it falls below the entity’s materiality threshold). Therefore each error needs to be assessed individually and in aggregate with any other unadjusted errors to determine the materiality of the error in terms of both its quantitative and qualitative impact on the financial statements. As the assessment of the qualitative impact of an error involves professional judgment, better practice entities will also have a review and sign-off on the schedule of adjusted and unadjusted errors. See information at: 7.5.2 Analysis and adjustment of errors or misstatements. 7.2.4 Responsibility for determining the application of materialityThe responsibility rests with both those charged with governance of the entity and its management for determining:
The entity and the auditor both have a responsibility to consider and apply materiality in the context of the accounting and auditing standards respectively. These materiality thresholds may differ, so it is important that an entity is aware of the auditor’s approach, and wherever practicable makes corrections for all audit identified adjustments. 7.2.5 Setting a materiality thresholdIn applying materiality in the preparation of its financial statements, an overall materiality threshold may be a useful reference point to guide decisions about the application of materiality to particular items or groupings of items and in determining the approach to be followed in respect of the correction of errors and misstatements. These matters should first be discussed with the audit committee and the auditor during the planning phase of the financial statements preparation process. 7.2.6 Assessing materialityIn making assessments on recognition, measurement, classification and disclosures in the financial statements, the responsibility of preparers is to include all information users require to understand the entity’s financial performance and position during the reporting period. In a public sector context, these assessments must include any additional information required by the Finance Minister and take into account significant matters of interest to the Parliament. 7.2.7 Materiality and record keepingThe application of materiality in the context of preparing the financial statements should not, however, detract from the responsibilities of entities to maintain proper accounts and records, and for those accounts and records, including relevant systems, to accurately record the entity’s financial transactions and other events. 7.2.8 Materiality and disclosuresFinancial statements note disclosures is another area where the concept of materiality can usefully be applied. The overall readability and usefulness of financial statements can be adversely affected by excessive length and the complexity of particular disclosures, or by excessive brevity. Better practice note disclosures are concise and assist the reader to understand how the financial operations of the entity have been reflected in the financial statements. It is therefore good practice if entities conduct a review of financial statement disclosures periodically. 7.2.9 Additional resources7.3 Undertaking preparatory work before year-endTo improve data integrity and the efficiency of year-end procedures, better practice entities prepare some work well in advance of the year-end. A major benefit derived from the elimination of peaks in activity is that staff involved in the preparation of financial statements are able to operate in a less pressurised manner, thus allowing more time to perform critical tasks well, and allow time for review and quality assurance. This in turn reduces the incidence of error, and is likely to improve the overall efficiency of the process. Many entities also use hard or soft close processes, or a combination of both approaches, to prepare work prior to year-end.
The common aim of each of these approaches is to enable an entity to expedite the finalisation of the financial statements at year-end and to achieve timely audit clearance. 7.3.1 Deciding on a hard or soft close processThe decision to undertake a particular close process will generally depend on the effectiveness of an entity’s systems and processes, the nature and complexity of its transactions and operations and whether there are advantages in spreading the workload involved in preparing the financial statements over a longer period. However, while the need to conduct a hard close may diminish as entities’ systems and processes mature, the ability to provide reliable and timely financial statements improves and leads to accurate full accrual monthly financial statements being produced. An entity’s judgement about the appropriate approach to adopt will be influenced by:
These factors should be considered and discussed with the entity’s audit committee. To maximise the effectiveness of the particular approach adopted, the auditors should also be consulted on the feasibility and efficiency of conducting an audit of the hard close statements or those elements completed for a soft close. A decision on whether the auditor will conduct an audit and how long it will take will be influenced by the capacity of entities to prepare satisfactory auditable financial statements, working papers and other supporting documentation within an agreed timeframe. The audit approach will therefore depend on each entity’s particular circumstances. Entities should consult their auditors at an early date so that both parties can discuss and agree an approach that is mutually beneficial. Entities may also see benefit from internal audit, or an independent party, reviewing the outcome of the particular close process. 7.3.2 Hard close considerationsIn effect a full hard close is regarded as a full trial run of the end-of-year processes, recognising that some balances and processes can only realistically be calculated or conducted at or after year-end. A hard close typically involves:
Hard closes should also involve independent valuation and estimates for balances that are not able to be determined by other means. For example, the valuation of non-current assets and the actuarial assessments of certain liabilities. Such an approach may be resource intensive and many entities prefer to undertake a modified hard close that involves preparing the majority of their financial statements but not completing tasks such as stocktakes and asset valuations. Often it is more cost-effective to complete such tasks once as at year-end. A key determinant in timing a hard close is the nature and timing of key financial transactions or events. For example, an entity that processes significant financial transactions in May and June may benefit from conducting a hard close as at the end of March or April. By contrast, an entity whose business cycle is relatively stable and consistent may schedule a hard close at the end of April or May, noting that the later a hard close is undertaken, the less time entities have to resolve issues before preparing the annual statements. 7.3.3 Soft close considerationsA soft close involves ‘closing the books’ with enough precision to provide specified key financial information to management. In practice most, if not all, entities undertake a soft close periodically during the year to meet their monthly or quarterly management reporting obligations. In a soft close:
However, a number of issues can impede the full-year financial statements preparation and the audit clearance process including the:
It is therefore important that such issues are addressed prior to the preparation of the full year’s financial statements. 7.3.4 Additional resources7.4 Developing accounting estimatesDue to inherent uncertainties in business activities, some financial statements items cannot be measured with precision, and must be estimated. Such accounting estimates require the exercise of judgement, based on pre-determined assumptions and therefore have a higher inherent risk of material misstatement. Accounting estimates are frequently required for items such as:
In some cases, assumptions will be based on government statistics such as inflation rates, interest rates, exchange rates, mortality rates, employment rates and taxation. In other cases, the assumptions will be specific to the entity and will be based on current and/or historical internally generated and/or service provider data. Better practice development of accounting estimates is characterised by:
7.4.1 Accounting estimates - controls and expertiseAs the inherent risk of material misstatement is greater when financial statement balances are based on accounting estimates, it is essential that entities establish and maintain a process to develop and produce reliable accounting estimates. A high degree of specialised knowledge and judgement may be required in the case of complex accounting estimates where the risk of developing unreliable estimates increases. Qualified personnel with the necessary skills and knowledge should be selected to prepare accounting estimates. If appropriate, experts within or outside the entity can also be used. These personnel should have:
7.4.2 Risk assessment for accounting estimatesIn assessing the risks of material misstatement in accounting estimates, entities should identify factors that may affect their reliability and assess whether the level of estimation variance lies within an acceptable tolerance level. For example, a change in assumption could materially affect the estimate recognised in the financial statements. The existence of recognised measurement techniques should assist in mitigating the degree of uncertainty associated with an estimate. A change in circumstances such as new legislation may require the entity to revise or develop new accounting estimates. Entities should incorporate mechanisms in their risk management process to identify the need for revised or new accounting estimates. 7.4.3 Analysing the effect of uncertaintySensitivity analysis can be used to analyse the effect of uncertainty. Varying the level of inputs or assumptions may help to determine the degree of variation in the monetary amount of an accounting estimate. It also helps to identify the assumptions that are likely to create the most significant variation or degree of unreliability. An assessment of the degree or range of variation provides a basis for assessing the potential risk of error in the financial statements. Disclosure of estimation uncertainty may assist entities to meet the applicable financial reporting requirements (such as AASB 13 Fair Value Measurement and AASB 119 Employee Benefits). 7.4.4 Documentation of accounting estimatesDocumentation to support accounting estimates is particularly important, as it:
Documentation should include information on:
7.5 Using analytical proceduresRigorous and objective analytical procedures undertaken during the financial statements preparation process will help to improve the accuracy of the statements. Analytical procedures are used to identify unusual relationships and items in the statements that may affect their accuracy and completeness, or assist in identifying potential errors or omissions. Procedures can range from simple comparisons of items to complex analytical models of relationships. More sophisticated procedures are often used to analyse administered items. Various analytical procedures can be used. In selecting and applying procedures, including, but not limited to:
An entity should consider factors such as the complexity and nature of its activities, the availability and reliability of information used for comparison, and the skills and knowledge of the analysts. Analytical procedures require significant business expertise and judgements as well as a good understanding of accounting principles and processes. 7.5.1 How to implement analytical proceduresEntities should consider the following when incorporating analytical procedures into their systems and processes:
7.5.2 Analysis and adjustment of errors or misstatementsWhen errors or misstatements are identified during the year-end process, it is important for entities to:
7.5.3 Additional resources
7.6 Using technologyMany entities process a number of journals at the end of each month and at year-end for a variety of reasons including posting accruals, allocating costs and reclassifying income and expenditure. In many instances, these journals are manually compiled and processed, and some are of a recurring nature. Better practice entities seek to automate the computation and processing of recurring journals to improve the efficiency of processing, and to minimise the occurrence of human error. Better practice entities also regularly review journals that are raised to correct processing errors. By analysing the type and frequency of errors, entities may be able to find and eliminate their root cause, thereby improving the efficiency of the year-end close process. Regular reviews of arrangements for, and personnel with, systems access should also be undertaken and documented to ensure that access is only provided to appropriately skilled personnel and segregation of duties is maintained wherever possible. 7.6.1 Use of technology for faster, more accurate processingIncreasingly, entities are using technology to automate, simplify and streamline particular tasks and functions, including production of monthly reports, year-end financial statements, bank reconciliations, purchasing and payments. Apart from the obvious efficiencies involved, automation of financial statements processes helps to:
The integrity of mapping general ledger accounts to financial statement line items should be periodically confirmed through review and quality assurance processes, and strict controls need to be in place to manage any software upgrades or changes. In addition to a centralised FMIS, better practice entities require data entry at source, preferably online and in real time. Better practice entities also foster a culture of ‘getting it right’ the first time, with errors returned to the originator of the data for correction. 7.6.2 Managing the dependency on technologyIt is important that the financial statements team is aware of any systems risks, issues and changes that could impact on the preparation of the financial statements. Better practice entities work collaboratively with the ICT team to establish processes, controls (including cyber security controls), and timeframes for discussing and addressing any system upgrades, breakdowns or other risks that may affect the integrity or timeliness of financial information. 7.7 Preparing accounting position papersAccounting position papers are an important tool that better practice entities use to document key decisions and to keep stakeholders apprised of updates to accounting policies and processes, plus their impact on the entity’s financial statements. Accounting position papers may also address yearly assessments or plans for addressing complex items or accounting estimates, such as:
7.7.1 Content and structure of accounting position papersAccounting position papers should document all the matters considered when making the decision, and would normally include the following information:
7.7.2 Additional resources
7.8 Collecting information from business areasWhile processing and reporting activity is generally centralised in the entity’s financial statements team, key transactions are often recorded by business areas. Entities may need to collect source documentation for inclusion in or to support their financial statement working papers from business areas and/or third parties. This documentation may also assist the audit. The information generally required from business areas relates to:
Entities should determine the information that is available in the FMIS and the additional information that must be collected manually. For the manual collection process, better practice entities collect information, at hard close and year-end, by using a reporting package (usually a standardised information collection pack). 7.8.1 Additional resources7.9 Shared servicesShared services generally involve an entity providing corporate or other services to one or more other entities. Outsourcing functionality through shared services arrangements is becoming increasingly common in Government. As entities continue to be accountable for the risks associated with the function(s) being delivered by the shared services provider, as well as the quality of financial data in these circumstances, it is important for entities to maintain close working relationships with shared services providers and effectively manage the shared services arrangements. Better practice entities will ensure that: there is clear agreement on:
7.9.1 Managing shared services arrangementsStrong management of shared services arrangements, in line with the examples identified below, supports an effective financial statements preparation processes:
Assurance requirements should be included in a formal agreement with shared services providers. Some entities have found it useful to invite representatives from shared services hubs to attend governance fora meetings (such as the audit and risk committee, a financial statements sub-committee, executive board depending upon the structure and risk profile of the entity) to discuss the assurance framework and walk through assurance items. 7.9.2 Issue managementBetter practice entities establish an escalation matrix with shared services providers to promote effective problem resolution. Formalised service standards and performance measures, along with close engagement commencing in the planning stages of the financial statements can support the identification and resolution of any difficulties that arise in a timely manner. 7.10 Sourcing expertsFinancial statements items that may require specialist expertise and knowledge can often be material and may involve fair value measurement and disclosure for a number of asset and liability balances at year-end. The following steps should be undertaken to obtain the required assurance about the work undertaken by an expert:
To facilitate both the internal quality assurance process and audit, the above steps should be clearly documented. 7.10.1 Clarifying the expert’s scope of workOnce an expert has been engaged, matters that need to be clearly determined and communicated to the expert in writing include:
7.10.2 Considerations for experts engaged to measure fair valueThe following matters are particularly important when an expert is engaged to assist in measuring fair value:
7.10.3 Engaging an expertWhen proposing to use an expert, management should assess the professional competence and objectivity of the person or firm they propose to engage. Factors to consider include:
References should generally be obtained to assist in substantiating the expert’s credentials. It is important that the engagement be actively managed to help ensure the work performance of the expert is satisfactory and the entity’s requirements are met. The key tasks involved in managing the engagement are to ensure that:
7.10.4 Evaluating the work of the expertManagement may rely on the professional expertise of relevant experts. However, to be in a position to assess whether the expert’s assessment or valuation is suitable for inclusion in the entity’s financial statements, management should form their own conclusions based on a review of the work undertaken, asking relevant questions, and evaluating the answers so that the entity is satisfied that the assessment or valuation is appropriate for inclusion in the financial statements. The review would generally involve:
The extent of management’s review will depend on a number of factors such as:
Page 2
The Finance Minister (supported by Finance) has a significant role in Commonwealth financial reporting, as part of their responsibilities for the PGPA Act. To assist entities to discharge their responsibilities under the PGPA Act, Finance develops and issues: Policies are based on the AAS, Australian Interpretations, guidance and other financial reporting policies developed by Finance. This involves interpretations of accounting policies, advice on reporting and appropriation requirements and the development and maintenance of the budget and reporting framework. Finance is also the convenor of forums, communities of practice and professional development seminars which provide vehicles for the discussion of accounting, auditing and related topics with the CFOs and officers from Commonwealth entities. Attendance at forums can assist in obtaining an understanding of Finance’s responsibilities and identifying emerging financial reporting issues. Where requested, Finance also provides financial reporting advice to Commonwealth entities. It is important to engage with Finance early in the process of developing accounting positions, allowing sufficient time for a response to be formulated. The CFO should establish agreed lines of communication with Finance officials to help ensure that any issues arising in the context of financial statements, for which it is appropriate to seek advice from Finance, are identified and resolved in a timely manner. When requesting advice from Finance, better practice entities include:
|
What is the systematic process of measuring and reporting relevant financial information about the activities of an economic organization or unit?
Postagens relacionadas
direito autoral © 2024 mesadeestudo Inc.
