Chapter 25
Discom PLC
Directors are needed to run the company on a day-to-day basis. Discom PLC is likely to have
many thousands of shareholders and it would be impossible to get them all together
regularly and quickly enough to enable effective decisions to be made. Getting an agreement
with so many people involved would also be difficult.
Directors are responsible for the effective management of the business, which will include:
1. Making day-to-day decisions to ensure that the resources owned by the company (and therefore
its shareholders) are being managed effectively.
2. Ensuring that the company complies with relevant legislation.
3. Ensuring the financial accounts are prepared in accordance with legislation and accounting
regulations.
4. Deciding on the amount of dividends that can be paid to the shareholders.
5. The EGM would have been called for by the company’s shareholders – often the constitution of
the company will state that shareholders representing a specified percentage of total share capital
are needed to call the meeting.
Shareholders may call for the dismissal of directors for a number of reasons including:
1 Unreasonable lack of dividends being paid.
2 Incompetence or misconduct, e.g. fraud or illegal behaviour.
3 The company being led in unethical or immoral directions – major decisions might not meet with
the approval of the shareholders.
Directors might be acting beyond their authority as set out in the company’s constitution
(acting ‘ultra vires’ or beyond their powers is the legal term).
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Shareholders may suspect financial mismanagement or fraud and want the auditors to
investigate – it may be that they want the problems to be identified or sorted out so that
the new board of directors knows what it is inheriting!
Activity 25.1
a) An internal auditor is an employee of the company, responsible to the directors of the
company for the performance of their day-to-day duties. Their work will involve looking at
the financial systems in place in the company, ensuring the proper day-to-day management
of the company finances. They may also have some involvement in the preparation of the
financial statements of the company on behalf of the directors.
External auditors are not employees of the company and the process of auditing is separate
from the preparation of the financial statements. They are appointed by the shareholders to
act on their behalf. Their role is to consider whether the financial statements prepared by
the directors and presented to the ordinary shareholders are free from any material
misstatement or error and to report their findings.
b) A true and fair view means that the financial statements are free from any material
misstatement and error and faithfully represent the financial performance of the business
for the period under review.
c) The auditors must consider the materiality of the proposed adjustments in deciding what
action to take.
If adjustments are considered to be material (significant) and necessary to ensure that a
true and fair view is given but are not made, then a qualified audit report is required.
If the adjustments are deemed not to be material then an unqualified report is still possible.
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Activity 25.2
1 Overadded inventory: this should be adjusted under IAS 8 as it would appear to be a (large)
material error. It has also come to light before the accounts have been approved.
2 Directors’ bonuses: this is an adjustable event under IAS 10 because the conditions existed at the
year-end – the directors were always going to be paid a bonus, it was just the size that was
unknown. The change can be made before the accounts are approved.
3 Irrecoverable debt: this is not an adjusting event because it happened after the accounts were
approved on 31 August 2020. It is of course possible that the expense has been accounted for if the
company had made this customer the subject of a specific allowance for doubtful debts but the
actual balance of $61000 cannot be formally written off.
4 Factory in France: this is not an adjusting event because the conditions did not exist at 31 March
2020 so any financial impact of buying the factory will need to be recorded in the accounts for the
following year.
5 Legal proceeding: this is not an adjusting event because the conditions did not exist at 31 March
2020 – the faulty goods had not yet been bought. So any financial impact of starting legal
proceedings will need to be recorded in the accounts for the following year.
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Exam-style questions
1 B The company may be large enough that the external auditors carry out their work throughout
the year. In some cases, there might be a continuous presence to ensure that the work is completed.
2 D This will go into the following period’s financial statements. In the cases of A, B and C, it is likely
that the conditions leading to these events existed at the year end.
3 D The likelihood of losing the case is more than the 50% required in the case of contingent
liabilities for a provision to be made.
4 a Adjustments?
i Under IAS 10: Post Balance Sheet Events, the irrecoverable debt can be included because the
conditions existed at the year-end date even though the amounts or timing might have been
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uncertain. The change needs to have been actioned before the directors authorised the accounts. In
any event, including the irrecoverable in the 2020 accounts before it had officially occurred is a fairly
classic application of the prudence concept (and is often seen applied through the creation or
adjustment of the allowance for doubtful debts).
ii The court cases are dealt with by IAS 37: Provisions, Contingent Liabilities & Contingent Assets.
• The first court case deals with a possible liability. If losing the court case was more than a 50%
probability with reasonable quantifiable damages, then we would need to make a provision for the
liability. However, neither is the case and so we will create a contingent liability note to the
accounts.
• The second court case satisfies the 50% likelihood rule but is not quantifiable. Even if it were, IAS
37 will only allow us to make a contingent asset note to the accounts (the prudence concept does
not allow even virtually certain and virtually quantifiable cases to feature in the statement of profit
or loss or in the statement of financial position).
iii Under IAS 8: Accounting Policies, assuming that the amount is considered material, the inventory
figure does need to be adjusted. As the lower selling price existed at the year end, there is more
justification for reducing the inventory value by $12 000. Furthermore, as was covered in the chapter
on Manufacturing accounts, IAS 2: Inventories states that inventory should be shown at the ‘lower of
cost and net realisable value’.
iv Under IAS 8: Accounting Policies, assuming that the amount is considered material, errors need to
be corrected and so the revenue figure needs to be reduced by $27 000.
v Under IAS 10: Post Balance Sheet Events, the bonuses should be adjusted because the conditions
existed at the year-end date – the directors were always going to get bonuses – it was just the size of
those bonuses that was uncertain. As employees, the directors’ bonuses do represent an expense
that must be reduced.
Note: had any of these issues become known once the accounts had been approved/authorised,
then no adjustments would have been allowed.
b Adjusted profit figure:
Original profit 421000
Irrecoverable debt[1] (18000)
Reduction of inventory (12000)
Duplicated sale (27000)
Reduction of directors’ bonuses 11000
Revised profit 375000
Note:
[1] This assumes that there has been no specific allowance for doubtful debt provision made in
respect of this customer, in which case the expense may already have been accounted for.
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board of directors: a group of people elected by a company’s shareholders to represent the
shareholders’ interests and ensure that the company’s management acts on their behalf.
steward: someone who is appointed to look after money or property belonging to another person or
organisation.
directors’ report: a report prepared by the directors of a PLC at the end of the financial year.
audit report: an external report prepared by the auditors of a limited company stating whether or
not the annual financial statements provide a true and fair view.
International Accounting Standards (IASs): standards created by the International Accounting
Standards Board stating how particular types of transaction or other events should be reflected in
the financial statements of a business entity.
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Strategic Report:
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Computerised Accounting Situations not found
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Ethics and the accountant
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