Financial Statement Analysis, BBA 7th Semester

Lecture No. 6
FINANCIAL STATEMENTS

Statement of Changes in Equity:

The statement of changes in equity shows the movement in the shareholders
equity (capital and reserves) during the year. We can say that it replaces profit
and loss appropriation account of partnership business.

Equity
Equity is the total of capital, reserves and undistributed profit. That means the
amount contributed by share holders plus accumulated profits of the company.
Equity, therefore, represents the total of shareholders fund in the company.

FORMAT OF STATEMENT OF CHANGES IN EQUITY

Lucky Cement Limited

Statement of changes in Equity
For the Year ended June 30, 2010
Share Share Retained
Particulars Reserve Total
Capital Premium Earning
Balance On Jun 30, 2009 xxxx xxxx xxxx xxxx xxxx
Net income for the year xxxx xxxx
Transfer to Reserve xxxx xxxx
Dividend Declare (xxxx) (xxxx)
Issuance of Share xxxx xxxx xxxx
Balance On Jun 30, 2010 xxxx xxxx xxxx xxxx xxxx

Annual Report Generated By Business:

Annual Report is part of Financial Reporting Process which contains Financial
Statements, Notes to financial statements, Auditors’ Report, Five-year summary
of key financial and non-financial data, and Management’s discussion and
analysis of operations (MD&A).

Auditor’s Report:
Audit of financial statements is independent of the business issuing these.
Financial Statements preparation is Management’s responsibility, whereas
expressing opinion as to their fairness is the Auditor’s responsibility, Audit
Report is issued along with financial statements to persons outside the business.
It provides assurance to outside users about the completeness and reliability (not
necessarily accuracy) of Financial Statements.
Auditor is hired by the company being audited. Usually a Management letter is
also issued by Auditors to Company’s management, recommending steps for
improving company’s internal control structures.

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Financial Statement Analysis, BBA 7th Semester

Fairness’ in the context of Auditor’s Report means that financial statements are
not misleading. Audit is conducted according to Generally Accepted Auditing
Standards. During Audit, the Auditors obtain reasonable assurance that financial
statements are free of “material” misstatements.
Audit is conducted by examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. It assesses the accounting
principles used and significant estimates made by management. It must also be
noted that Audit‘s purpose is to determine fairness of financial statements and
not to detect frauds, as such. In the context of materiality, it is to be noted that an
item is material if knowledge of this might reasonably be expected to influence
user’s decisions. Also to be noted is the fact an auditor can also make errors like a
physician does in diagnosis.
End product of every audit is the auditor’s report. An audit involves collection of
audit evidence about the truth and fairness of financial statements or other
proposition under review. By careful examination of the evidence so called the
auditor draws appropriate conclusions and forms his opinion. The auditor’s
report summarizes results of the work conducted by the auditor and formally
communicates the auditor’s opinion.
It is important to note that the auditor’s report simply expresses the auditor’s
opinion on truth and fairness of financial statements as absolutely correct. An
auditor’s report is a formal statement that includes the reporting auditor’s
opinion formed after careful examination of books of accounts and related
documents. Where as, a certificate is written conformation of absolute accuracy
of the facts stated therein and does not involve any estimate or opinion.

Types of auditor’s opinion:

An auditor’s opinion may be unqualified, qualified or adverse. In certain
circumstances the auditor may disclaim an opinion i.e states his inability to
express an opinion.

Unqualified opinion:
Opinion of an auditor is termed as unqualified when the auditor concludes that
that the financial statements give a true and fair view in accordance with the
identified financial reporting framework.
There is no statuary definition of the words “true and fair”. However, true and
fair has been taken to mean the following: (I) free from prejudice or bias, (II)
presentation of an objective picture, (III) in accordance with generally accepted
accounting principles, (IV) consistent and having clarity,(V) not misleading and
understandable by the reader of financial statements,. (V) Presented fairly, in all
material respects.
Identified financial reporting framework means the set of statutes, rulers, and
standards etc. That applies to the preparation and presentation and presentation
of such financial statements.

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Financial Statement Analysis, BBA 7th Semester

According to the companies ordinance 1984, in an unqualified audit report the

auditor is required to make some statutory affirmations without reservations, as
prescribed in section 255(3).
In an unqualified opinion the auditor also impliedly undertakes that any changes
in accounting principles or in the method of their application, and the effects
thereof, have been properly determined and disclosed in the financial statements.

Modified opinion:
An auditor may not be able to express an unqualified opinion. When either of the
following circumstances exists and, in the auditor’s judgment, the effect of which
is or may be material to the financial statements:-
(a) There is a limitation on the scope of the auditor’s work; or
(b) There is a disagreement with management regarding the acceptability of the
accounting policies selected, the method of their application or the adequacy of
financial statement disclosures.
The circumstances described in (a) could lead to a qualified opinion or a
disclaimer of opinion. The circumstances described in (b) could lead to a
qualified opinion or an adverse opinion.

(i) Qualified Opinion

Opinion of an auditor is termed as qualified opinion when the auditor concludes
that an unqualified opinion cannot be expressed but that the effect of any
disagreement with management, or limitation on scope is not as material and
pervasive as to require and adverse opinion or a disclaimer of opinion. A
qualified opinion is expressed as being ‘except for’ the effects of the matter to
which the qualification relates.

(ii) Disclaimer of opinion

A disclaimer of opinion should be expressed when possible effect of a limitation
on scope of audit is so material and pervasive that the auditor has not been able
to obtain sufficient appropriate audit evidence an accordingly is unable to
express an opinion on the financial statements

(iii) Adverse opinion.

An adverse opinion should be expressed when the effect of a disagreement is so
material and pervasive to the financial statements that the auditor concludes that
a qualification of the report is not adequate to disclose the misleading or
incomplete nature of the financial statements.

Statements of Audit Reports (Format of the Audit Reports)

“Un-qualified Audit Certificate/Opinion”: We have examined the

accounts/financial statements of________ up to the year ended 30th June, _____,

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Financial Statement Analysis, BBA 7th Semester

and other record based on these accounts and we got all the information required
by us. In our opinion the financial statements and the accounts on which they are
based have been prepared in conformity with generally accepted accounting
principles, and present a true and fair position of the affairs of
_________________.

“Qualified Audit Certificate/Opinion”: We have examined the accounts of

_________ up to the year ended 30th June, _______ and other record based on
these accounts and we got all the information required by us. In our opinion the
financial statements and the accounts on which they are based have generally
been prepared in conformity with the generally accepted accounting principles,
and these present a true and fair position of the affairs of _________ subject to the
observations and findings mentioned in the enclosed report.

“Adverse Audit Certificate/Opinion”: We have examined the accounts of

__________ up to the year ended 30th June, _____ and other record based on
these accounts and we got all the information required by us. In our opinion the
financial statements and the accounts on which they are based have not been
prepared in conformity with generally accepted accounting principles, and these
do not present a true and fair position of the affairs of _________ because of the
errors mentioned in the enclosed report.

Disclaimer of opinion: We are unable to issue an audit certificate on the

accounts of ________ for the period _______, as we could not verify the financial
statements and the accounts on which they are based due to non-availability of
the necessary information or because of our inability to visit (Locations) or due to
the non-cooperation by the auditee staff in providing the necessary records
(name the documents).

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