Common Errors in Financial Statements

By Howard, C. Randy; Taylor, Barbara G. | Journal of Accountancy, February 1990 | Go to article overview

Common Errors in Financial Statements


Howard, C. Randy, Taylor, Barbara G., Journal of Accountancy


COMMON ERRORS IN FINANCIAL STATEMENTS

As the demand for better and fuller financial statement disclosure grows, CPAs must be aware of proper presentations. This article examines common financial statement errors found by the Montana Society of CPAs financial statement review committee and explains how practitioners can correct or improve presentations.

FIVE PROBLEM AREAS

Some of the most frequently seen errors relate to long-term debt, related-party disclosures, accompanying information, goodwill and references to accountants' reports.

Long-term debt disclosures. The most common error was inappropriate disclosure of long-term debt under Financial Accounting Standards Board Statement no. 47, Disclosure of Long-Term Obligations. The combined aggregate amount of maturities and sinking-fund requirements for all long-term borrowings must be disclosed for each of the five years following the date of the latest balance sheet presented. In some of the financial statements, the disclosures were simply omitted. In others, disclosure was insufficient.

While Statement no. 47 doesn't specify the exact disclosure format, here's an example of an acceptable presentation:

D Company has two long-term borrowings outstanding. The first is a $100,000 sinking-fund debenture with annual sinking-fund payments of $10,000 in 19X2, 19X3 and 19X4; $15,000 in 19X5 and 19X6; and $20,000 in 19X7 and 19X8. The second borrowing is a $50,000 note due in 19X5. D's disclosure might be the following:

Maturities and sinking fund requirements on long-term debt are as follows:

  19X2          $10,000
  19X3           10,000
  19X4           10,000
  19X5           65,000
  19X6           15,000
  19X7-19X8      40,000
               $150,000

Related-party disclosures. Notes receivable and notes payable between shareholders and closely held corporations were common related-party transactions, but in some financial statements the related-party notes were not disclosed adequately. In some of the footnotes, the descriptions, amounts or terms of the related-party notes were not disclosed as required by FASB Statement no. 57, Related Party Disclosures.

There also may have been errors of omission for related-party disclosures, but the committee didn't have access to CPAs' workpapers. Specifically, Statement no. 57 requires disclosure of related-party transactions even when no dollar amounts are involved. For example, if the sole shareholder of a closely held corporation allows the corporation to use one of his buildings as a warehouse but receives no rental payments, this transaction should be disclosed.

Some footnotes contained assertions that the related-party transactions were at "amounts that approximate their market value." This may imply the transactions were on terms similar to those of an arm's-length transaction. Accounting literature contains caveats about such assertions for both the asserter and the attester. Representations about related-party transactions should not imply they were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated. Therefore, CPAs must be able to substantiate comments that the "amounts approximate their market value."

Statement on Auditing Standards no. 45, Omnibus Statement on Auditing Standards--1983, advises auditors that such representations are difficult to substantiate. CPAs also should be aware that they are giving the same level of assurance that the related-party transactions were at fair market value as they are giving to the financial statements as a whole. Since the footnotes are an integral part of the statements, CPAs attest to assertions about fair market values contained in the footnotes. Therefore, if such a representation is included in the footnotes and the auditor believes management does not substantiate it, depending on materiality, he or she should express a qualified or adverse opinion because of a departure from generally accepted accounting principles. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Common Errors in Financial Statements
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.