Year-end Financial Statements…

An understanding of ideas that conflict

The clash between internal controls and the preparation of year-end financial statements has been a significant issue, often breaching standards and causing disruptions among stakeholders. This disruption was so severe that the Australian Securities and Investment Commission (ASIC) penalised 36 organisations for failing to lodge financial statements [1]. Additionally, 25 organisations had to amend their financial statements, and the ASIC commenced action against their auditors [2]. The traditional notions of policies and procedures for internal controls and financial statements have been shattered, and they can no longer function in isolation from stakeholders.

We aim to align the policies and procedures for internal controls and financial statements with the Australian Auditing and Accounting Standards. This strategic alignment seeks to foster a comprehensive understanding among internal and external stakeholders, potentially mitigating the conflicts observed in the past.

Key terms:

Assertions: Individual management accounts that require classification and consolidation to comply with the recognition and measurement requirements of the Australian Accounting Standards.  For example, individual bank accounts will be classified as cash on hand, cash at bank and cash on deposit. This level of classification forms the assertions to be tested by the auditor.

Controls: are internal organisational policies and procedures.

Inherent risks: are natural conditions that allow for errors or fraud.

References

1.         Australian Securities & Investments Commission. ASIC obtains over $700,000 in penalties for financial reporting failures. 2023, 28 September

2.         Australian Securities & Investments Commission. Annual financial reporting and audit surveillance report  2022–23 2023

Example document.

Policies and procedures

ASA 315.19.a - Understanding of the entity and its environment

 Organisational structure:

XYZ Company Ltd is a company limited by guarantee incorporated under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 and registered with the Australian Charities and Not-for-Profits Commission (ACNC). 

Ownership and governance:

The board consist of six directors and 30 members throughout Queensland.

Business model including integration of IT:

XYZ Company Ltd helps individuals with disabilities and mental health needs live independently in their communities. The organisation uses custom smartphone apps to allow employees to track contact with clients for billing, medication tracking, and evidence for compliance with the National Disability Insurance Scheme (NDIS). SharePoint is used for document management, and Xero is used for all accounting, bookkeeping, and payroll functions.

Industry, regulatory and other external factors:

Externally, XYZ Company Ltd is governed by the Corporations (Aboriginal and Torres Strait Islander) Act 2006 and the Australian Charities and Not-for-Profits Commission Act 2012 and regulations. Internal, XYZ Company Ltd is governed by its constitution, conduct, ethics, and behaviour policies.

Externally, XYZ Company Ltd is regulated by federal and state legislation. Federally, it is registered with the NDIS and complies with the NDIS Practice Standards and Code of Conduct. Through all states and territories, it complies with child protection, disability, and human rights legislation.

Financial performance:

XYZ Company Ltd internally assesses financial performance at the macro and micro levels. The macro level is assessed at the board level based on the liquidity of the working capital, the positive cash flows generated, and the strength of the equity. Management assesses the micro level in compliance with funding agreements and budgets.

 ASA 315.19.b - Financial reporting framework

XYZ Company Ltd is classified as a large public company limited by guarantee registered with the Office of the Registrar of Indigenous Corporations. Under the Australian Accounting Standard AASB 1053, the company has adopted general-purpose tier-two reporting requirements.

ASA 315.19.c - Inherent risks

XYZ Company Ltd understands that inherent risks of accounting estimates and fair valuations require significant judgment and can affect the susceptibility of assertions to misstatements in the financial reporting framework.  All assets and liabilities are assessed annually for their inherent risk. Management uses external consultants, qualified accountants, valuators, and quantity surveyors where a high inherent risk is identified.

Critical assets and liabilities identified:

1. Revenue from contracts with customers - AASB 15 Revenue from Contracts with Customers.

2. Property, plant, and equipment—AASB 13 Fair Value Measurement, AASB 116 Property, Plant and Equipment, and AASB 136 Impairment of Assets.

3. Contract liabilities - AASB 15 Revenue from Contracts with Customers.

4. Employee provisions - AAS 119 Employee Benefits.

Income

Revenue from contracts with customers - Inherent risk: Knowledge of Accounting Standards required

Events - Inherent risk: Cash receipts susceptible to fraud

Fundraising - Inherent risk: Cash receipts susceptible to fraud

Raffles - Inherent risk: Cash receipts susceptible to fraud

Other revenue - Inherent risk: Complex legal discourse

Bequests - Inherent risk: Cash receipts susceptible to fraud

Donations - Inherent risk: Cash receipts susceptible to fraud

Grants - Inherent risk: Compliance with agreements and accounting standards

Sponsorships - Inherent risk: Recorded in the correct period

Other revenue - Inherent risk: Immaterial in nature can be classified incorrectly

Current assets

Cash and cash equivalents - Inherent risk: Year-end balances misstated

Trade and other receivables - Inherent risk: Recorded in the correct period or not recoverable

Contract assets - Inherent risk: Knowledge of Accounting Standards required

Non-current assets

Property, plant and equipment - Inherent risk: Assets not recognised or recorded at fair value

ASA 315.20 Accounting policies

Management assesses the accounting policies annually for compliance with the general-purpose tie two reporting requirements and submits their assessment to the board of directors and the external auditor.