Annual Report 2016

18
Financial Audit | FAOA 2016
Audit of the cash flow statement
Subject to certain selective amendments,
the accounting standard
IAS 7, «Statement of cash flows»,
has now been in force in its current
form since 1 January 1994. The cash
flow statement groups cash flows
under operating, investing and financing
activities. It also forms part
of the primary financial statements
and is an important performance indicator
for stakeholders.
The FAOA assessed compliance with
the auditing and accounting standards
that apply to the audit of the
cash flow statement in its file reviews,
which covered nine audits across
various industries 11 .
Three of the five largest audit firms
use a standard cash flow statement
audit programme. The FAOA found
from its sample that audit teams documented
the cash flow preparation
process satisfactorily but did not rely
on the effectiveness of controls. The
FAOA assumes that a purely substantive
approach was taken on efficiency
grounds. In eight of the nine sampled
cases management prepared the cash
flow statement under the indirect
method. Alongside material cash
flows from investing and financing
activities, the audit team therefore
also audited the non-cash expenses
and income added to, respectively
deducted from, the operating result.
Substantive testing was designed and
performed satisfactorily in terms of
nature and scope with one exception.
In this case the operating cash flow
contained an error which exceeded
planning materiality. In addition, two
other significant cash flow statement
positions were not audited sufficiently.
Audit of earnings per share
The accounting standard IAS 33,
«Earnings per share», has now been
in force in its current form since 1 January
2005. Quoted companies that
prepare their entity, respectively group,
financial statements under IFRS must
disclose earnings per share on their
income statement 12 . The aim of this
requirement is to improve comparability
of results for different companies
and over multiple accounting periods.
Earnings per share is a basis for determining
the price-earnings ratio 13 that
is, in turn, central to share valuation.
Compliance with relevant audit and
accounting standards was examined
for a total of nine audit engagements
14 . Seven involved checking
compliance with IFRS, one compliance
with US-GAAP 15 and one compliance
with Swiss GAAP FER 16 . Earnings per
share was not identified as a significant
risk on any of the engagements.
However, in two engagements the
audit team determined IFRS compliance
of the entity, respectively group,
financial statements to be a significant
risk. In three of the nine cases the entity,
respectively group, financial statements
were additionally reviewed by
an accounting specialist independent
of the audit team. Surprisingly, in the
cases where IFRS compliance had been
determined to be a significant risk no
additional IFRS specialist review was
arranged. The auditor-in-charge did
not review the audit working papers
relating to earnings per share in any of
the audit engagements examined. The
audit teams on all the engagements
examined used so-called «disclosure
checklists», the purpose of which is to
achieve complete and accurate financial
statement disclosure. One of the
largest audit firms had developed a
separate audit programme that audit
teams were required to use in
addition to the disclosure checklist.
None of the audit firms inspected required
consultation with respect to
earnings per share.
Although other studies 17 suggest that
the computation and disclosure of
earnings per share is subject to a relatively
high error quota, the FAOA had
only two findings on compliance with
accounting standards at the audit engagements
examined. In one case, it
was found that the calculation of diluted
earnings per share wrongly included
shares that had already been
issued. This did not affect disclosure
materially due to the small number of
shares. In a second case, the financial
statements did not disclose diluted
earnings per share even though
the audited entity had a dilutive
participation plan. These findings
may have resulted from a lack of accounting
specialist involvement or a
lack of review by an experienced audit
team member.
In five of nine cases earnings per
share was also disclosed in a part of
the financial statements (so-called
«other information») that is generally
unaudited (e.g. management report,
summary of performance indicators).
In one case sampled, an earnings per
share amount «normalised» for special
items, such as restructuring and
impairment charges, was disclosed by
the company in the unaudited part
of the financial statements alongside
the IFRS earnings per share. On
the positive side, it is to be noted
that the company informed readers
of the differing computational bases
and disclosed a reconciliation 18 .
11 The inspection reports on two of the five
largest audit firms were yet to be finalised
at the reporting date and are therefore not
included in the evaluation.
12 Analogous to other national and international
accounting standards.
13
The price-earnings ratio shows share price
in relation earnings per share.
14 The inspection reports on two of the five
largest audit firms were yet to be finalised
at the reporting date and are therefore not
included in the evaluation.
15 Financial Accounting Standards Board
(FASB), Accounting Standards Codification
(ASC) Topic 260, Earnings per Share.
16 Swiss GAAP FER 31, Ergänzende Fachempfehlungen
für kotierte Unternehmen,
Paragraph 5. FER 31 is first effective for
financial statements beginning on or after
1 January 2015.
17 Refer particularly to Hüttche Tobias, Dicke
Bretter, wenig Späne – Entdeckte Fehler
in der IFRSRechnungslegung. Eine Analyse
von Fehlern in Finanzberichten, den Ursachen
und Hinweise zu ihrer Vermeidung,
Der Schweizer Treuhänder 2012, page 79 f.
18 In this regard, reference is made to the
IFAC guideline «Developing and Reporting
Supplementary Financial Measures – Definition,
Principles, and Disclosures», that
aims to achieve the consistent and transparent
disclosure of «non-GAAP measures»
by reporting companies.