Consolidated Financial Statements of the Company and Audit on Tests Carried out - Example

Statement of financial position

XYZ Company

STATEMENTS OF FINANCIAL POSITION

December 31,

(in thousands)

ASSETS

20122011

ASSETS

Current assets

Cash and cash equivalents $ 7,949,281 $ 4,908,428

Prepaid expenses and other assets 2,124 1,126

Accounts receivable, net 23,977 22,377

Related-party accounts receivable, net 182 152

Investments 77,558 72,108

Land held for sale, net - 10,905

Land, building and equipment, net 9,448 9,844

Jerusalem property development 10,977 10,747

Beneficial interests in perpetual trusts 7,697 7,157

TOTAL ASSETS$ 150,344 $155,385

LIABILITIES AND NET ASSETS

LIABILITIES

Accounts payable and accrued liabilities $ 16,528 $ 18,700

Deferred revenue 1,991 1,712

Notes payable 168 10,803

Deferred lease payments 10,405 10,642

Total liabilities 29,092 41,857

NET ASSETS

Unrestricted

Undesignated 11,672 11,618

Board-designated 45,917 45,016

Total unrestricted 57,589 56,634

Temporarily restricted 41,448 35,626

Permanently restricted 22,215 21,268

Total net assets 121,252 113,528

TOTAL LIABILITIES AND NET ASSETS$ 150,344 $ 155,385

Statement of activities

XYZ Company

CONSOLIDATED STATEMENT OF ACTIVITIES

For the year ended December 31, 2012

(In thousands)

Temporarily Permanently

Unrestricted restricted restricted Total

Revenues and support

Contributions and support

Government and other grants$ 5,093 $ 19,714 $ - $ 24,807

Corporate and foundation gifts - 3,209 - 3,209

General 141 275 407 823

Jerusalem International YMCA 222 - - 222

World Service campaign - 1,153 - 1,153

Total contributions and support 5,456 24,351 407 30,214

Financial support from member YMCAs 52,496 - - 52,496

Program and service revenue 5,969 - - 5,969

Jerusalem International YMCA program revenue 4,878 - - 4,878

Royalties and other revenue 2,387 - - 2,387

Interest and dividends 1,038 298 - 1,336

Net assets released from restrictions 21,904(21,904) - -

Total revenues and support 94,128 2,745 407 97,280

Expenses

Program activities

Social responsibility 38,777 - - 38,777

Youth development 26,029 - - 26,029

Healthy living 21,413 - - 21,413

Total program activities 86,219 - - 86,219

Supporting services

Management and general 10,681 - - 10,681

Fund-raising 2,181 - - 2,181

Total supporting services 12,862 - - 12,862

Total expenses 99,081 - - 99,081

Change in net assets from operations (4,953) 2,745407 (1,801)

Non-operating activities

Net realized and unrealized gains on investments 5,908 3,077 - 8,985

Change in beneficial interests in perpetual trusts - -540 540

Total non-operating activities 5,908 3,077 540 9,525

CHANGE IN NET ASSETS955 5,822 947 7,724

Net assets at beginning of year 56,634 35,626 21,268 113,528

Net assets at end of year $ 57,589$ 41,448$ 22,215$ 121,252

Statement of cash flows

XYZ Company

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31,

(In thousands)

2012 2011

Cash flows from operating activities

Change in net assets $ 7,724 $ 1,089

Adjustments to reconcile change in net assets to net cash

used in operating activities

Depreciation and amortization 1,558 1,385

Net realized and unrealized (gains) losses on investments (8,985) 2,363

Change in beneficial interests in perpetual trusts (540) 534

Permanently restricted contributions(407) (477)

Changes in operating assets and liabilities

Accounts payable and accrued liabilities (2,172) (5,342)

Accounts receivable (1,600) (5,037)

Deferred revenue and lease payments 42 805

Prepaid expenses and other assets (998)(75)

Net cash used in operating activities (5,378) (4,755)

Cash flows from investing activities

Disposal of land held for sale 10,905 -

Jerusalem property development (1,371) (1,119)

Jerusalem property development - arbitration award1,141 1,528

Acquisitions of land, building and equipment, net (1,163) (596)

Sales of investments 3,913 2,937

Purchases of investments (407)(477)

Net cash provided by investing activities 13,018 2,273

Cash flows from financing activities

Permanently restricted contributions 407 477

Payments on notes payable (10,635)(4,272)

Net cash used in financing activities (10,228)(3,795)

NET DECREASE IN CASH AND

CASH EQUIVALENTS (2,588) (6,277)

Cash and cash equivalents at beginning of year20,96927,246

Cash and cash equivalents at end of year $18,381$20,969

Supplemental disclosure of cash flow information

Cash paid for interest $ 204 $ 62

Audit report on different tests carried out

To the hiring manager

Audit tests were carried out on the above financial statements of XYZ company. These statements comprised of balance sheet as at 31 December 2012, functional statement of expenses and income statement for the year for the same financial year. The responsibility of the management in regard to the audit was to prepare the financial statements through their accountants and to ensure that they reflect a true and fair view of the organization financial position. Our responsibility as a group was to express opinion on financial statements of XYZ Company. The auditing was conducted independently and on a fair manner. Necessary requirement and auditing standards were adhered to, these standards required us to have a detailed plan and methodology and perform the audit well to obtain an assurance reasonable enough to make the conclusion that the financial statements were free from any misstatements. Different tests were performed on different financial statements to help in determining if any misappropriation occurred; accuracy in financial records is attributed to either error or fraud. According to the Institute of Chartered Accountants of India error is usually unintentional. In contrast fraud is typically intentional, individual commit frauds for financial gain hence the need by an organization to hire the services of an external auditor who is independent to purposely help identify any fraudulent behavior.

Control tests

Before embarking on testing different controls embraced by an organization it was important for us to first establish that the controls existed and were in use. The group conducted tests of controls to establish the effectiveness of operation of controls that were purposely designed to prevent and detect frauds, errors or misappropriation of the company’s assets and cash. The Institute of Chartered Accountants of India argues that errors that end up in the financial statements of an organization result from errors made in initial entry of figures also known as inherent risks. Finding such errors formed the bulk work in our auditing process. Test of controls were carried out to evaluate whether different controls functioned according to the plan. Furthermore, tests of controls were conducted to evaluate the XYZ company internal audit system ability to detect and prevent errors as they occur, these tests helped in establishing whether the organization had the necessary resources needed to help the internal auditor detect error in the financial accounts and take necessary measures of tracing its source for efficiency and consistency (Messier et al 65)

Tests of controls were classified in to performance, observation and inspection. Under performance test of control, as a group we were able to initiate a noble transaction to help determine the effectiveness of controls in use by our client organization, the ability to understand controls in use helped the team in planning the amount of time to be allocated to a particular control to establish its operation effectiveness. Under observation test of control, the group observed the actions of the organization in relation to record keeping of undertakings that involve the use of cash. Observation was essential as it provided the group with first-hand information which is unbiased, members observed while making short notes on how the organization carried its daily operations. Through inspection test of controls, the group inspected the organization documents stamps, signature approvals and review checkmarks to gauge whether the control was performed. Stamps and signature approvals are indications of genuine activities which are known and approved by the management. Additionally, tests of controls were essential to help determine whether the control objective was satisfactory, it enable the group establish whether the individuals mandated with overseeing proper operation of the control had the proper skills, competence and necessary authority. Despite the fact that the necessary extent to which the group was willing to test a control was highly affected by the performance frequency of the control during the audit process, the duration of time during the audit when the audit or relied on the control effectiveness, reliability and relevance of the evidence to be obtained from the control operating effectiveness and the nature of the control the group was able to come to the conclusion that; controls enacted by the management of XYZ company were clear and were being followed accordingly. The organization in compiling their financial statements adheredto all the necessary standards. Test on performance controls revealed that XYZ company internal audit system was well equipped in terms of resources and had professional individuals with ability to detect errors as they occur and take necessary measures of having them rectified. Through observation control the group was able to make a conclusion that XYZ organization individuals are keen in their record keeping and updating. This indicated that, because of their level of professionalism they were aware of consequences of errors made during initial entries and the affect they can have on the final figures contained in the organization end of financial year statements as put forward in the (CALCPA Report,202). Through observation we were able to discover that the organization staff carry out their activities in compliance with organization and profession standards as stipulated in the Company act and in their certifications respectively. From inspection control tests we were able to ascertain that the organization exercises a high degree of accountability and openness. All the transaction which required approval form different personal had their signature approvals and stamps with dates on them. This showed that the organization staff delegated with the duty of managing the organization financial transactions were reliable and responsible. Analysis of objectives of different controls showed that the objectives were tied to expected goals to be achieved. From this examination the group ascertained that objectives of different controls were well formulated and with proper implementation the organization could achieve its goals. The group further established that individuals assigned the responsibility of maintaining and updating different controls had the qualification required.

Compliance tests

The next category of tests carried out were compliance tests. Right from an organization inception, standards are usually developed to guide the organization on the level of quality of service or product to achieve.Organizations management develop these standards in line with the main goals of the organization and when properly followed can result to the organization success. Compliances key to the XYZ Company are implemented and enforced by a committee of experts established by the organization management. In addition, this committee is tasked with inventing new standards and where necessary improving on the existing standards. These standards are usually enacted according to different departments or processes key to the organization; they guide the individuals in related fields on how to exercise good practice in line with the organization requirement while professionally executing their duties (Hoffelder et al, 3). As an organization expands in productivity, standards need to be reviewed to remain up to date with current state of affairs of the organization. Compliance tests are usually important as they help an organization to look and trace its operations background and make necessary changes for better results (Dan et al, 9). The aim of carrying out these tests was to help establish whether XYZ company employees complied with the organization stipulated standards. Compliance type of audit tests werecarried out to check whether the organization standards weremet. Compliance tests were directed on identifying any deviation from required operation norm and act so as to advice the organization and help it remain focused on achieving its goals. Opinion of the group regarding compliance tests depicts that the client organization employees comply with standards stipulated by the company. From the group view this is attributed to the fact that the organization involves its employees in every undertaking. Involvement of employees in determining how and what should be done to improve on a particular process provides them with that sense of belonging and helps in eliminating that feeling by employees of being neglected, this motivates them to work hard and in accordance with the organization stipulations and accepted code of conduct. Study reveals that employee commitment to organization standards results to improved quality of products or services offered and increase in productivity (Hoffelder et al 201). Commitment means that each and every employee knows the part he or she is supposed to play within the organization and that with proper coordination they are able to work with little or no supervision, without deviating from the standards of the organization. According to the results of compliance tests carried out on XYZ company employees, it is crystal clear that nearly every employee is aware and clearly understands and complies with the organization standards. This is attributed to the management ability to exercise control over their activities and to their proper leadership skills. The ability to coordinate their activities well and through performing employee performance appraisals in order to motivate them to working even harder.

Substantive tests

Substantive testing concerns itself with reviewing for errors all the financial statements and supporting documents of the organization (Alvin et al, 13). The group engaged in substantive testing to help determine with evidence that the financial statements were complete,valid and without errors. Substantive testing covered a wide range of tests and involved the following tests which were conducted by the group members. Members contacted customers to ascertain that the balances depicted on the account receivable records were accurate, they confirmed through calculations the validity of inventory records; recalculation helped in identifying any errors that might have occurred during calculation by the organization staff, they physically confirmed that the fixed assets in the company records really existed and that appreciation and depreciation values were correctly and cumulatively computed, they contacted suppliers to countercheck the accuracy of the values shown in account payable records. Moreover, the group contacted lenders to the company to ascertain that the values within the company records were the right one, review of the directors’ minutes was carried out to verify whether their existed any approved dividends and if any the percentage amount to be allocated to them. The opinion of the group regarding substantive tests on the financial records of XYZ company is that through the feedback provided by both customers and suppliers,the account receivable and payable account balances respectively showed the correct amounts just as indicated within the financial statements showed above in the beginning of this work. This is a clear indication that no errors were committed. It further shows that no fraudulent acts were perpetrated by the company employees. Recalculation conducted by the group resulted to values equivalent to the ones contained in the financial records of the organization. Physical identification of the company assets showed that the assets of the company as indicated in the financial records existed and the depreciation and appreciation computations of different assets were correct and accurate. Amount of loans obtained by the company and interests they attract was clearly reviewed and different lenders contacted for confirmation. The confirmed facts were as shown in the organization accounts hence substantive tests carried out on the organization financial accounts showed that the financial accounts of the company were kept well and necessary adjustments were usually made for effectiveness and accuracy. The group opinion is that the values contained within different accounts were correct and without doubt and that their use in determining the financial position of the organization provided accurate results of the organization financial standing in terms of profits or losses made. According to Elizabeth K, audit results provides an assurance to the company investors and stakeholders of the financial situation of their company hence they are able to analyze the gains or losses of their investment on the company and make future plans (Katherine et al 48).

Conclusion

In conclusion, the general audit of financial statements can only result to two different types of opinions; qualified or unqualified. Unqualified opinion shows that in preparing the financial statements the organization employees constantly used the accepted principles of accounting, it further shows that the statements were prepared in compliance with relevant statutory regulations, it further shows that all the material matters and information required was disclosed. Unqualified opinions show that the financial records of the organization are free from errors and other fraudulent behavior (Graham et al, 9). It shows that the company employees mandated with preparing financial records are carefully executing their duties with due considerations. It shows that they are adhering to all measures required by accounting framework. Qualified opinion shows that the auditor encountered a lot of misstatement on the financial statement during his or her audit process. Such opinions show that errors and fraud have being committed by the organization. Qualified opinion reports regarding the financial statement of an organization are critical, they show mismanagement of the financial assets of the company and such reports usually scare away investors (Graham et al, 29).

Reports provided from a particular auditing process differ with regard to the audit process embraced and the objectives of the audit process. Auditing process in any organization is of great importance hence organizations need to appreciate the good work attributed to a good auditing system. Substantive tests can require confirmation from third parties, a situation which is encouraged as it does not inconvenience the auditors’ decision rather improves their efficiency as it helps in establishing whether the balances contained on various account are correct through counter checking with involved parties. Substantive testing in addition is involved in recalculating most of the calculation made by the client company staff and in observation of transaction as they happen. Auditors after conducting an audit summarize their finding for their client management. These findings include errors and risks discovered during the auditing process. Such reports are usually detailed and can aid the management in their decision making. In order for a company to incur minimal costs from outsourcing an external auditor, it is highly advised that they have an internal auditor who is capable of accurately assessing the financial records of the organization for assurance and to help eliminate issues of errors in the company’s financial statements (Elizabeth 3). Organization creditors and investors prefer external auditors because of their independent examination of the client organization, this exposes fraudulent activities in their process. Independence in auditing is crucial hence auditors upon receiving the certification to exercise their knowledge and skills are required to adhere to the standards of engagement as stipulated in their field of profession. Engaging in auditing the financial records of an organization is crucial and renders it mandatory that the auditor should not have a financial stake in the organization he or she is intending to conduct an audit and that he or she should not have a relative who has stake on the same company as this may result to biased results, results inclined to benefit the auditor or the relative rather than the company stakeholders. Compliance audit tests are carried to establish compliance to standards by an organization (Dan et al,19). Many organizations prefer their financial statements to be certified by an individual external to the organization who is independent; results from such audits are used by the organization as the basis for inviting prospective investors to invest their resources on such organizations. Certified financial statements by an external auditor can help an organization obtain funding from lending institutions to help improve on their operations. Regarding the accuracy and effectiveness of financial records of a particular organization opinions of the audit can either be qualified or unqualified. Unqualified opinion shows that the financial statements are fair and true. Unqualified opinion on a particular audit is an indication that the financial statements are prepared in line with the accepted financial reporting framework. Unqualified opinion is issued by an auditor if no misappropriation has been encountered during the audit process and the value contained in the financial statements represent a true and fair position of the organization financially. Unqualified opinion is the outcome most anticipated by the management as it depicts accountability of the financial system of an organization as a whole. The other opinion by an auditor from analysis of financial records of an organization is qualified opinion. Qualified opinion results from the organization failure to comply with acknowledged accounting ethics. Qualified opinion auditor report is an indication of misappropriation of the organization funds the management.