Financial reporting quiz: Half of respondents failed

We have a new contender for the toughest quiz to date – our financial reporting standards quiz has knocked the previous reigning champ of the challengers off the podium. 

Haven’t completed the quiz? It’s just six questions – before you go on to see the answers, test your knowledge here.

 Selecting a financial reporting regime

It may seem counterintuitive that the expert adviser doesn’t make the decision here, but the standards are clear. A quick check of IFA’s Guidance on Accounts Preparation Engagements shows:

“Entities have a choice of which financial reporting regime they follow. The decision as to which financial reporting regime is adopted should be made by the directors of the entity. While a professional accountant can provide advice to their clients regarding reporting regimes, it would be unethical for an accountant to determine or dictate which regime a client follows.”

Is this business a micro-entity?

The answer to question two is complex. The reason you should investigate last year’s turnover, balance sheet and employee figures is that the criteria must be exceeded in two consecutive years for the business to cease to qualify as a micro-entity.

If this is the entity’s first year exceeding the micro-entity thresholds, it’s possible to report as a micro-entity. But this may not ultimately serve the growing business’s interests.

While micro-entity accounts are simple, accountants have a duty of care to ensure the appropriate regime is followed. Reporting a business as a micro-entity when it is not – after two years exceeding thresholds, for instance – would be unethical.

Can charitable companies report as micro-entities?

Several types of entities are excluded from being treated as micro-entities, including: 

• Charitable companies
• Investment undertakings
• Financial institutions
• Subsidiaries that are fully consolidated in group accounts
• Parent companies that prepare group accounts

Noting the basis of preparation 

The reference ‘generally accepted accounting standards’ is meaningless. Half of you were either very familiar with the guidance, which specifically advises against these phrases, or you saw right through that vague, unquantifiable wording. Standards are exacting for a reason – it would be difficult to define what is and is not ‘generally’ accepted.

Filing for charities

If its gross income exceeds £25,000, an unincorporated charity must file accounts with the Charity Commission within 10 months of the year end.

What to do if you notice errors in a financial report

If you see incorrect or misleading information in a client’s financial statements, you should have an open discussion about what you require and why you require it. After that conversation, if financial statements are still incomplete or misleading, consider withdrawing from the engagement and not permitting your name to be associated with the statements.

“Remember, if you haven’t reported in accordance with financial standards, it really can come back to hurt you,” IFA Director of Professional Standards Tim Pinkney says. “If you’re surprised, be suspicious. Always exercise professional scepticism.”

Provide a letter of disengagement, and keep a record of its receipt. Explain the reasons for your withdrawal, unless doing so would breach regulatory or legal requirements, such as ‘tipping off’ under the Money Laundering Regulations.

Keep up to date with the changes in financial reporting requirements – find out more about the IFA’s quarterly Financial Reporting Update webinars.