● trading:these cash flows are shown under the heading of ‘operating activities’;
● dividends received from joint ventures and associates. These will be shown under this heading following the implementation of FRS 9 in June 1998;
● interest, dividends received and any dividends paid to ‘non-equity’ shares and minority interests: these cash flows are shown under the heading of ‘returns on investment and servicing of finance’;
● tax:these cash flows are shown under the heading of ‘taxation’;
● buying and selling fixed assets:these cash flows are shown under the heading ‘cap- ital expenditure and financial investment’;
● buying and selling businesses and trades: these cash flows are shown under the heading ‘acquisitions and disposals’;
● dividends paid to ordinary shareholders: these cash flows are shown under the heading of ‘equity dividends paid’;
● short-term investments that are shown as current asset investments:these cash flows are shown under the heading ‘management of liquid resources’;
● shares and loans:these cash flows are shown under the heading of ‘financing’.
Looking at the cash flow statement helps us see where the company has been spending and raising its money and whether the company is living within its means. This is probably the most important document of all; profit can be created, but you either have cash or you do not.
You can always spot a business that is engaging in creative accounting – the cash runs out!
The cash flow statement is discussed in detail in Chapter 16.
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The statement of total recognised gains and losses
This is a relatively new document, much burdened by its title. It forms a bridge between the profit and loss account and the balance sheet bringing together profit, asset valuations and currency adjustments. It shows any gain or loss that the company has shown in its accounts, regardless of whether it has been realised and taken through the profit and loss account. The information found in the statement of total recognised gains and losses is not new; it has always been in the accounts, but buried far away in the notes.
The statement of total recognised gains and losses is concerned with movements on reserves and profitability, acknowledging that a non-professional reader of the accounts may not read all the notes and, therefore, may not know of all the gains and losses taken by the business in the year. By looking at this statement the reader can see instantly:
● whether the company has made a profit, before paying dividends
● whether the fixed assets have been revalued during the year
● the impact of any currency movements on the overall worth of the company.
The statement of total recognised gains and losses is discussed in more detail in Chapter 17.
To do this the auditor will check that proper accounting records have been kept and that the accounts reflect those accounting records (Extract 4.1).
The auditors’ report is very important. Anyone looking at a set of accounts needs to be confident that those accounts are a true reflection of the company’s performance. The growth of creative accounting in the 1980s generated increasing concerns about the relia- bility of the accounting information and the quality of the audit. The accounting rules were seen as too lax, and the auditors were accused of being the lapdogs rather than the watch- dogs of the accounting profession. Some of the concerns were probably justified, but there was much confusion about the role of auditors. The general public seemed to have a higher expectation than was legally required. The auditors were not required to comment on the directors’ stewardship or the future prospects for the company. The Cadbury Report (dis- cussed later in this chapter) sought to clarify the position. It recommends that the directors should explain their responsibility for preparing the accounts and the auditors’ reports should contain a clear statement of the auditors’ responsibilities. The auditing profession has attempted to redress some of the other problems by revising the guidelines for conducting audits and expanding the audit report.
Auditing guidelines are issued by the Auditing Practices Board (APB). This was started in 1991 by the six principal accountancy bodies (the Consultative Committee of Accountancy Bodies). The APB issues Statements of Auditing Standards (SASs), and any auditors not fol-
4 The auditors’ report
We have audited the financial statements on pages 50 to 75. We have also examined the amounts disclosed relating to emoluments, share options and long-term incentive scheme interests of the directors which form part of the board remuneration committee’s reports on pages 40 to 45.
Respective responsibilities of directors and auditorsAs described on page 46, the company’s direc- tors are responsible for the preparation of the financial statements. It is our responsibility to form an inde- pendent opinon, based on our audit, on those financial statements and to report our opinion to you.
Basis of opinionWe conducted our audit in accordance with Auditing Standards issued by the Audit- ing Practices Board. An audit examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group’s circumstances, consistently applied and ade- quately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we consider necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irreg- ularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.
OpinionIn our opinion the financial statements give a true and fair view of the state of affairs of the company and the group as at 31 March 1997 and of the profit of the group for the year then ended and have been properly prepared in accordance with the Companies Act 1985.
KPMG Audit PlcChartered Accountants Registered Auditor
Birmingham 4 June 1997
Auditors' report to the members of The Boots Company plc Extract 4.1
lowing these are liable to disciplinary proceedings. It also issues practice notes and bulletins, reflecting good practice.
In May 1993 the APB issued SAS 600 (Auditors’ Reports on Financial Statements), and this has changed the length and content of auditors’ reports. Auditors’ reports must now contain:
● a title specifying to whom the report is addressed;
● an introductory paragraph identifying the financial statements that have been audited;
● appropriately headed, separate sections discussing:
– the respective responsibilities of the directors and the auditors;
– the basis of the auditors’ opinion;
– the auditors’ opinion on the financial statements.
The auditors’ report should also be signed and dated.
SAS 600 requires that the report ‘should contain a clear expression of opinion on the financial statements’. The auditors may offer an unequivocal opinion that the accounts are true and fair, or that they are not. However, the situation may not be that black and white, in some situations they may need to qualify their opinion in some way.
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Fundamental uncertainty
Auditors must now draw attention to any inherent uncertainties that they believe to be fun- damental to the understanding of the accounts. For example, the auditors could be con- cerned about the continued support of the company’s bankers or the outcome of a major litigation. The fundamental uncertainty may, or may not, lead to the accounts being quali- fied. If the uncertainty has been properly disclosed and accounted for in the accounts, there will be no reason for the accounts to be qualified.
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Qualification of the accounts
There are some situations where the auditors may be unable to arrive at unequivocal view on the accounts. Then they will qualify the accounts, by identifying the source of the prob- lem. This will occur where:
● There is inadequate or insufficient information available to the auditors to enable them to determine whether proper accounting records have been kept. This is referred to as a limitation of scope. This often happens in small companies, where there is insufficient information to support some of the items shown in the accounts.
● There is a disagreement about the accounting treatment or disclosure of information contained in the accounts. The auditors may disagree with the amounts or the facts disclosed in the accounts. (For example, the auditors could be concerned about the level of provisioning.) Alternatively, they could disagree with the way things have or have not been disclosed in the accounts.
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Disclaimer of opinion
If an uncertainty or lack of adequate information could have a major impact on the accounts, the auditors will give a ‘disclaimer of opinion’. This is given when the auditors have been unable to obtain sufficient evidence to support an opinion on the financial state- ments. The audit report will clearly state that they are unable to form an opinion that the accounts are true and fair.
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Adverse opinion
This is the report we do not want to see in the accounts! This is given when the auditors believe that the information in the accounts is seriously misleading. They will then state that in their opinion the accounts do not give a true and fair view.