PRACTICAL ERROR ANALYSIS FOR FINANCIAL STATEMENTS
In practice, draft financial statements are submitted by subordinates to their managers, these draft financial statements may be checked the following steps to identify errors or sometime fraud:
- Comparative figures from previous periods
- Unusual change in amount
- New type of accounts
- Relevant ratios analysis
- Analytical procedures etc.
Let practice with the following example:
Top Trading Group Co.,Ltd is merchandising company, and company has two major products. The following comparative income statements are here.
Currently financial statements are unreliable, so old financial manager resigned for his position. You are new financial manager for Top Trading Group Co.,Ltd, and your accountants prepare financial statements to review, but you suspect that financial statements may have errors or frauds during review.
| Top Trading Group Co.,Ltd | ||
| Comparative Income Statement | ||
| For 2015 | ||
| November | December | |
| Sale: | ||
| Sale from Product 1 ……………………….. | 200,000 | 220,000 |
| Sale from Product 2 ………………………. | 100,000 | 110,000 |
| Sale from Other Products ………………… | 160,000 | 176,000 |
| Total Sale …………………………… | 460,000 | 506,000 |
| Cost of Goods Sold: | ||
| Product 1-COGS ……………………………………. | 140,000 | 151,800 |
| Product 2-COGS …………………………………. | 80,000 | 99,000 |
| Other Products-COGS ………………………….. | 144,000 | 123,200 |
| Total COGS ……………………………… | 364,000 | 374,000 |
| Gross Profit …………………………… | 96,000 | 132,000 |
| Other Income – Rental Income …… | 2,000 | 3,000 |
| Total Expense: | ||
| Advertising ……………………………………… | 4,000 | 4,400 |
| Salary ……………………………………………… | 10,000 | 9,000 |
| Office supply …………………………………… | 400 | 600 |
| Electricity ………………………………………….. | 500 | 2,000 |
| Water supply……………………………………… | 300 | 350 |
| Rental …………………………………………… | 14,000 | 18,000 |
| Telephone and Internet…………………… | 800 | 880 |
| Depreciation……………………………… | 1,200 | 1,400 |
| Interest expense………………………… | 1,400 | 1,600 |
| Other expense………………………… | 740 | 814 |
| Total Expense……………………….. | 33,340 | 39,044 |
| Net Income/(loss) ………………… | 64,660 | 95,956 |
During period, company bought fixed assets more.
Required:
According to your professional judgment, identify possible frauds or errors for comparative income statements if any with reasonable explanation for any suspicion.